Recent political worry is centered on a number of high-profile departures from the Trump administration, which pushed political-risk to its highest level since the 2003 invasion of Iraq. Wall Street, however, seems to have shrugged off risk emanating from the White House, based on a couple of metrics that measure sentiment and optimism. The Dow ended in the plus column on Mar 16, while the S&P 500 snapped a four-day losing streak.
Consumer sentiment touched a 14-year high, as mostly low-income households felt more optimistic about the economy. But such good vibes were not restricted to consumers only. Small-business owners’ optimism also hit its second-highest level ever.
As consumer confidence ticks up, consumer discretionary stocks will get the much-needed boost. Thus, investing in such stocks won’t be a bad proposition. Moreover, small caps should be preferred as the sentiment among small business owners has been on a tear lately.
Geopolitical Risk Index Touches Highest Level Since 2003
Much of the recent political turmoil is focused on a series of staff departures from the White House. Such events threaten to upset the Trump administration’s business-friendly policies. Nevertheless, the latest person whose position appears to be increasingly precarious is national security adviser H.R. McMaster. Trump has decided to oust him and has already conveyed the message to his chief of staff, John Kelly. Central Intelligence Agency Director Mike Pompeo earlier replaced Secretary of State Rex Tillerson.
These developments came in after chief economic advisor Gary Cohn departed from the White House following Trump’s plan to slap hefty tariffs on foreign steel and aluminum. He had opposed the high tariff proposal and called for a moderate approach toward protectionist trade policies. Trump is now planning to have economist and CNBC commentator Larry Kudlow replace Cohn.
Heightened political risk just took the Geopolitical Risk Index (GRI) to its highest level in 15 years. The last time the GRI climbed significantly was back in August due to North Korean tensions.
Consumer Sentiment Hits 14-Year High
Investors are surely keeping an eye on administration personnel moves, but they are focusing more on mostly upbeat economic data. U.S. consumer’s confidence hit the highest level this month since January 2004. As per the University of Michigan, the preliminary result of its consumer-sentiment index rose to 102 in March from 99.7 in February. The index also increased 5.3% this month from the year-ago period.
JPMorgan Chase economist Daniel Silver added that “this strength in sentiment is one of the reasons we think consumer spending will pick up soon following a soft start to the year.” Consumers are willing to spend more as they expect prices to rise in the near future. After all, near-term inflation expectation has climbed to its highest level in three years this month.
Small-Business Optimism Closes in on All-Time Record
But, it’s not just consumers, small business owners are also telling us loud and clear that they are optimistic. According to the National Federation of Independent Businesses, the index of small business optimism went up 0.7 points in February to 107.6, its second-highest reading ever. Such a strong number puts the index slightly short of its all-time record, set in 1983.
The lobby of small-business owners said that “the small business sector is very encouraged by the economic policies of the administration and the strength of the economy, willing to invest more and hire more if workers can be found to fill their open positions.”
The Winning Strategy
As consumer confidence climbs and small-business sentiment closes in on the Regan-era record, investing in consumer discretionary stocks with smaller-capitalization seems judicious. An uptick in consumer sentiment generally leads to a rise in outlays, eventually benefiting companies selling discretionary products. Small-caps are chosen as their businesses are flourishing in a way we haven’t seen for quite some time.
We have, thus, selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The stocks also boost a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum, and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
MCBC Holdings, Inc. (MCFT - Free Report) designs, manufactures and markets recreational sport boats. Currently, the stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings moved up 13.7% in the last 60 days. The company’s expected growth rate for the current quarter and year is 67.9% and 40.8%, respectively. MCBC Holdings has outperformed the Zacks Leisure and Recreation Services industry in the last one-year period (+34.4% vs. +16.6%).
Bluegreen Vacations Corporation (BXG - Free Report) operates as a sales, marketing and management company focusing on the vacation ownership industry. The Zacks Consensus Estimate for this Zacks Rank #2 company’s current-year earnings moved up 5.7% in the last 60 days. Its expected growth rate for the current year is a solid 19.3%. Bluegreen Vacations outperformed the Zacks Leisure and Recreation Services industry in the last one-year period (+58% vs. +4.7%).
Rocky Brands, Inc. (RCKY - Free Report) designs, manufactures and markets footwear and apparel. Currently, the stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings moved up 19.7% in the last 60 days. The company’s expected growth rate for the current quarter and year is 25% and 20.7%, respectively. Rocky Brands has outperformed the Zacks Shoes and Retail Apparel industry in the last one-year period (+57.7% vs. +23.9%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Tailored Brands, Inc. (TLRD - Free Report) operates as a specialty apparel retailer. Currently, the stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings moved up 11.2% in the last 60 days. The company’s expected growth rate for the current quarter and year is 66.8% and 8.2%, respectively. Tailored Brands has outperformed the Zacks Textile - Apparel industry in the last one-year period (+55.5% vs. +13%).
Malibu Boats, Inc. (MBUU - Free Report) manufactures, distributes, markets and sells recreational powerboats. Currently, the stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings moved up 13.1% in the last 60 days. The company’s expected growth rate for the current quarter and year is 44.9% and 44.2%, respectively. Malibu Boats has outperformed the Zacks Leisure and Recreation Products industry in the past one year (+17.7% vs. +16.6%).
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