On Apr 16, the U.S. Commerce Department reported retail sales growth of 0.6% for the month of March reversing the trend of decline in last three consecutive months. The core retail sales also increased in March. This is a major positive since it closely corresponds to the consumer expenditure component of U.S. GDP.
Rebound in March retail sales can primarily be attributed to strong performance by auto dealers followed by Internet retailers, pharmacies, restaurants & bars and stores that sell home furnishings. Given that economic fundamentals remain strong, betting on retail segments which have performed well in overall sales makes for a smart choice.
Robust March Retail Sales Data
Retail sales increased 0.6% in March. This was in sharp contrast to a decline of 1% and 2% in February and January, respectively. The March data was also better than the consensus estimate of a gain of 0.4%. Moreover, retail sales jumped up 4.5% year over year in March 2018.
The core retail sales data which excludes sales figures of automobiles, gasoline, building materials and food services, increased 0.4% in March. The auto dealers posted 2% increase in sales, biggest gain since September 2017. Notably, U.S. consumer spending accounts for nearly two-thirds of its GDP.
Massive Tax Overhaul
President Donald Trump introduced a massive cut in personal taxes which will be effective from 2018 to 2025. According to the new law, the top rate falls from 39.6% to 37%. This is followed by other slabs like 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. Significant reduction in personal tax rate was a major boost to individual’s disposable income.
Strong Consumer Sentiment
On Mar 27, the Conference Board reported U.S. consumer confidence data for the month of March. March’s reading of 127.7 was the second highest since the November 2017 index of 128.6. Notably, the reading for March 2017 was just 124.9. Modest hikes in interest rates failed to discourage discretionary purchases by individuals since wages and take-home pay continue to rise.
Healthy Job Market
A strong labor market is acting as a major driver of economic growth. The unemployment rate remained at a 17-year low of 4.1% in March, while workers’ hourly wages rose 8 cents, or 0.3%, to $26.82. In the first quarter of 2018, the labor market added 202,000 jobs on an average per month, better than the first quarter of previous two years.
Further, the Fed’s projection for the labor market released in March has added a little extra sweetness to the economic scenario. The central banks projection has indicated that the U.S. labor market will maintain near full employment levels over 2018-2020.
Solid GDP Outlook
On Mar 21, the Fed raised GDP growth forecast for 2018 to 2.7% from 2.5% in December 2017. Likewise the 2019 GDP estimate has been hiked to 2.4% from 2.1% in December 2017. PCE inflation is projected at 1.9%, which is lower than the central bank’s longer-run estimate of 2%.
Our Top Picks
A robust job market, massive tax cuts and solid economic data are likely to increase consumer spending in the months to come. Retail sales are likely to increase further once consumers feel the positive impact of tax cuts and increased government spending.
In anticipation, it makes good sense to buy stocks from those retail segments which performed well last month. We have narrowed down our search to the following stocks, each of which carries a Zacks Rank #1 (Strong Buy) and provides strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chart below depicts price performance of our five ptcks year to date.
Asbury Automotive Group Inc. (ABG - Free Report) is one of the largest automotive retailers. It offers customers an extensive range of automotive products and services. Asbury has expected earnings growth of 17% for current year. The Zacks Consensus Estimate for the current year has improved by 6.8% over the last 60 days.
Movado Group Inc. (MOV - Free Report) is one of the world's premier watchmakers. It designs, manufactures and distributes watches through ten most recognized and respected names. Movado has expected earnings growth of 12% for current year. The Zacks Consensus Estimate for the current year has improved by 16.7% over the last 60 days.
KAR Auction Services Inc. (KAR - Free Report) it operates as a used vehicle and salvage auto auction company in North America through its subsidiaries. KAR Auction has expected earnings growth of 18.8% for current year. The Zacks Consensus Estimate for the current year has improved by 11.7% over the last 60 days.
DineEquity Inc. (DIN - Free Report) is a full-service dining company. It operates and franchises restaurants under both the Applebee's Neighborhood Grill & Bar and IHOP brands. DineEquity has expected earnings growth of 22.7% for current year. The Zacks Consensus Estimate for the current year has improved by 21.5% over the last 60 days.
Ruth’s Hospitality Group Inc. (RUTH - Free Report) is the largest fine dining steakhouse-company in the United States. Ruth’s Hospitality has expected earnings growth of 22.7% for current year. The Zacks Consensus Estimate for the current year has improved by 11.6% over the last 60 days.
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