As another earnings season unfolds, it is time to reshuffle your portfolio but this time only to avoid adding stocks that have lower earnings beat predictability. Dodging these stocks will definitely minimize the risks to your portfolio. In today’s discussion, we are focusing on the Retail-Wholesale sector – one of the 16 Zacks categorized sectors – in a bid to identify those stocks that do not fulfill our expected earnings beat criteria of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.
Earnings Season So Far
Per Earnings Preview, as of Jul 21, out of the 97 S&P 500 companies that have come up with their quarterly numbers, approximately 78.4% have delivered positive earnings surprises, while 72.2% beat top-line expectations. According to the report, earnings of the S&P 500 companies that have reported so far are up 8.4% from the same-period last year, while revenues have increased 5.1%.
Total earnings for the index are expected to improve 8.6% from the same period last year on 4.7% higher revenues. The report also indicates that the Retail-Wholesale sector is expected to record top-line growth of 3.9% but is likely to witness earnings decline of 0.2% this season.
However, before zeroing in on the stocks, let’s have a look at all that is happening in the sector and how it is placed in the changing economic scenario.
Changing Retail Dynamics
The retail landscape has been undergoing a fundamental change, with technology playing a major role and the focus shifting to online shopping. This shift in buying pattern has forced retailers to come up with innovative ways to market their products. Retailers who have responded quickly to it by staying ahead technologically stand in good stead.
With a digital transformation in shopping and consumers splurging online, store and mall traffic has been hit hard. As a result, most retailers including big-box ones are struggling to compete with e-commerce channels. They are now focusing more on enhancing their omni-channel capabilities, optimizing store fleet and restructuring activities.
Sector’s Correlation with the Economy
The Retail-Wholesale sector has not been an outstanding performer but it still holds some promise, given the favorable economic indicators. However, we understand that the space is not fully immune to global uncertainties, which could limit growth.
The rebound in oil prices from all-time lows, improving labor market and gradual recovery in the housing market signal that the economy is on a recovery mode. These factors are favorable for retailers and definitely play a crucial role in raising buyers’ confidence. Consumer confidence, which ebbed some time back, took an unexpected “U” turn in June.
However, the second straight month of slump in retail sales overshadowed steady job additions and gradual wage acceleration. U.S. retail and food services sales in June declined 0.2%, following a revised reading of 0.1% decrease registered in May.
How to Identify the Laggards?
Surely, not all retail stocks are going to beat or meet expectations. There will be some slow coaches. We can identify them before they report by combining our proprietary Zack Rank and Earnings ESP system. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. Our research shows that stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) along with negative Earnings ESP have no or a very slim chance of outperforming estimates.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Portfolio Better Off Without These 5 Stocks
Stay away from Urban Outfitters, Inc. (URBN - Free Report) , a retailer and wholesaler of general consumer products. The stock holds a Zacks Rank #5 and has an Earnings ESP of -13.16%. The company is slated to report second-quarter fiscal 2018 results on Aug 15.
Advance Auto Parts, Inc. (AAP - Free Report) is another stock to shun. This provider of automotive replacement parts, accessories, batteries and maintenance items for cars, vans and sport utility vehicles holds a Zacks Rank #5 and has an Earnings ESP of -1.79%. The company is expected to come out with its second-quarter 2017 results on Aug 15.
Don’t let your portfolio fall prey to The Kroger Co. (KR - Free Report) with an Earnings ESP of -2.44% and a Zacks Rank #5. The grocery retailer is slated to report its second-quarter fiscal 2017 results on Sep 8.
Another stock that you should forget for now is American Eagle Outfitters, Inc. (AEO - Free Report) with a Zacks Rank #4 and an Earnings ESP of -6.25%. This specialty retailer of on-trend clothing, accessories, and personal care products is expected to release second-quarter fiscal 2017 results on Aug 16.
Foot Locker, Inc. (FL - Free Report) , which carries a Zacks Rank #4 and has an Earnings ESP of -6.52%, also does not deserve a place in your list of stocks. This retailer of athletic shoes and apparel is likely to report its second-quarter fiscal 2017 financial numbers on Aug 18.
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