Earnings season is all set to gather momentum and its time you look beyond U.S.-China trade dispute, Facebook data breach and apprehensions about three or more rate hikes by the Fed this year. Given strong economic fundamentals and lower corporate tax rate, the reporting cycle is likely to be a favorable one. Notably, per the latest Earnings Outlook, total earnings for the S&P 500 index is expected to rise 16% in the first quarter of 2018 versus 13.5% in the preceding quarter.
Among the 16 Zacks categorized sectors, we are focusing on Retail-Wholesale today, which typically performs well in a maturing economic cycle. Markedly, the sector is anticipated to witness year-over-year bottom-line growth of 12%, per the Earnings Outlook. Notably, this fares much better than the previous quarter, where earnings climbed 3%.
With unemployment rate still at 17-year low, consumer spending being favorable and government expenditure increasing, things appear to be fairly rosy for the U.S. economy. Notably, a strengthening labor market may lead to gradual wage acceleration, and in turn boost consumer confidence. All these sound constructive for retailers.
We expect this positive sentiment to translate into higher consumer spending, which accounts for more than two-thirds of U.S. economic activity. We note that consumer spending inched up 0.2% in February, following an equal rise in January. Meanwhile, personal income surged $67.3 billion or 0.4% in February, marking the third straight month of a similar percentage increase. All these factors paint a bright picture for retailers, who are also benefiting from the corporate tax rate cut.
Picking the Prospective Winners for the Season
All said, we used the Zacks methodology and identified retail stocks that not only boast solid fundamentals but are also poised to beat earnings estimates this reporting cycle. Our research shows that for stocks with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Consequently, investors can count on these stocks which are most likely to trump estimates.
Ruth's Hospitality Group, Inc. (RUTH - Free Report) , which is expected to report first-quarter 2018 results on May 4, is a solid bet with a long-term earnings growth rate of 14.3%. The Zacks Consensus Estimate for the quarter is pegged at 44 cents. The company delivered a positive earnings surprise of 12.8% in the preceding quarter. This operator of fine dining restaurants has an Earnings ESP of +14.29% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
You may also consider is KAR Auction Services, Inc. (KAR - Free Report) with a Zacks Rank #1 and an Earnings ESP of +1.35%. The Zacks Consensus Estimate for the quarter is pegged at 74 cents. The company delivered an average positive earnings surprise of 14.1% in the trailing four quarters. It has a long-term earnings growth rate of 11%. This global vehicle remarketing and technology solutions provider is expected to come out with first-quarter 2018 financial numbers on May 8.
Investors can even count on Urban Outfitters, Inc. (URBN - Free Report) with a Zacks Rank #2 and an Earnings ESP of +0.62%. The Zacks Consensus Estimate for the quarter is pegged at 29 cents. The company delivered an average positive earnings surprise of 8.5% in the trailing four quarters. It has a long-term earnings growth rate of 12%. This lifestyle specialty retailer that offers fashion apparel and accessories, footwear and home decor is expected to report first-quarter fiscal 2019 results on May 15.
Another lucrative option is The Gap, Inc. (GPS - Free Report) , an apparel retailer. The stock has a Zacks Rank #2 and an Earnings ESP of +2.35%. The Zacks Consensus Estimate for the quarter is pegged at 46 cents. The company registered an average positive earnings surprise of 11.1% in the trailing four quarters. It has a long-term earnings growth rate of 8%. The company is expected to announce first-quarter fiscal 2018 results on May 17.
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