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The largest increase in retail sales in seven months failed to lift consumer sentiment substantially on Tuesday. Moreover, a selloff in traditional retail stocks followed, raising concerns over the sector’s long-term prospects. Industry watchers may hold differing views on this issue, but it is becoming increasingly difficult to profit from the country's rising purchasing power using traditional retail stocks.

At the same time, it is difficult to ignore that a resilient labor market, accompanied by a slow and steady rise in wages, has made U.S. consumers increasingly confident. Traditional retail stocks may have lost their luster, but there are still several other avenues to profit from rising discretionary spending. Investing in consumer discretionary stocks from domains other than retail makes for a smart move at this point.

“Amazonification” Effect

The lion’s share of the spurt in July retail sales was attributable to a pickup in demand for autos and to what is now a national event, Amazon Prime Day. The annual event, during which consumers flock to Amazon.com (AMZN - Free Report) for the year’s best shopping deals, contributed to gains for every product category. The Department of Commerce’s report reflects this as a 1.3% monthly increase in what is categorized as non-store retail spending. 

But for the sudden spurt in auto sales, other notable movements in the consumer spending report also have crucial linkages with Amazon. For instance, the decline in sales at electronics stores is likely a result of most consumers opting to buy this category of products from online alternatives, possibly Amazon.

Home Depot Leads Retail Slide

While Amazon did end the day around 0.1% lower, investor attention was largely fixed on the fall in traditional retail stocks. Target Corporation (TGT - Free Report) , Nordstrom, Inc. (JWN - Free Report) , Kohl's Corporation (KSS - Free Report) and Dollar General Corporation (DG - Free Report) declined 2.6%, 1.5%, 1.5% and 3.8%, respectively. Only Wal-Mart Stores, Inc. (WMT - Free Report) ended the day unscathed, notching up a minor increase of 0.1%.

But of particular concern was a 2.7% decline in shares of The Home Depot, Inc. (HD - Free Report) , even after it reported stellar second-quarter results and raised its guidance for the second time for the year. Such a turn of events makes it amply clear that the company is not immune to “Amazonification” despite its status as a leading specialty retailer. This is particularly surprising since Do-It-Yourself (DIY) and professional customers form Home Depot’s core audience. But the move to sell Kenmore devices via Amazon indicates that even the building products behemoth is now susceptible to the rising power of the Kindle and Fire Stick maker.

Our Choices

Consumer’s growing tendency to switch from offline to online alternatives has been apparent even in the recent past. But this is possible the first spurt in retail trade which is being partially attributed to sales derived only from Amazon.com. Clearly, the days of retail are increasingly numbered.

However, this doesn’t mean that you should ignore the higher discretionary spending power of the American consumer. Several profitable alternatives from domains other than retail continue to exist. However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Nutrisystem, Inc. (NTRI - Free Report) is a leading provider of weight management products and services.

Nutrisystem has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 54.5% for the current year. Its earnings estimate for the current year has improved by 12.4% over the last 30 days.

Malibu Boats, Inc. (MBUU - Free Report) operates as a designer, manufacturer and marketer of sport boats primarily in the United States.

Malibu Boats has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 15% for the current year. Its earnings estimate for the current year has improved by 2.8% over the last 30 days.

SodaStream International Ltd. (SODA - Free Report) is engaged in the manufacture of home beverage carbonation systems, which enable consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water.

SodaStream has a VGM Score of B. The company has expected earnings growth of 33.6% for the current year. Its earnings estimate for the current year has improved by 6.6% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Royal Caribbean Cruises Ltd. (RCL - Free Report) is a cruise company. It owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises.

Royal Caribbean Cruises has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 22.4% for the current year. Its earnings estimate for the current year has improved by 3.3% over the last 30 days.

Bright Horizons Family Solutions Inc. (BFAM - Free Report) is engaged in providing employer-sponsored child care, early education and work/life solutions

Bright Horizons Family Solutions has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 22.9% for the current year. Its earnings estimate for the current year has improved by 1.8% over the last 30 days.

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