The earnings season is past its pinnacle with results from more than 380 S&P 500 members on board. But the main show still remains for the Retail-Wholesale sector, which is likely to take the center stage as the reporting cycle ramps up. The sector has gained approximately 13% so far in the year and has comfortably outperformed the S&P 500 index that advanced 7%.
Per the latest Earnings Preview report, total earnings for the S&P 500 index is expected to rise 23.9% in second-quarter 2018, with 14 of the 16 Zacks sectors likely to register double-digit earnings growth. Total revenues are projected to improve 9.3%.
Sector’s Correlation With the Economy
Retail-Wholesale, which typically performs well in a maturing economic cycle, is among the sectors that are likely to catch investor attention. Markedly, the sector is anticipated to witness bottom-line growth of 26.3%, while top-line is projected to increase 7.8%. The underlying economic strength backed by robust job market, latest tax reform and pro-business policies are likely to act as catalysts for the sector.
We note that the U.S. economy expanded at its rapidest in nearly four years during the second quarter, thanks to robust consumer spending, increasing business investments and government spending. Per the Commerce Department, U.S. GDP advanced at a pace of 4.1%, which is nearly twofold of the revised first-quarter rate of 2.2%.
Consumer spending — which accounts for about two-thirds of the U.S. economic activity — jumped 4% during this period, courtesy of rosy employment picture, tax cuts and steady rise in income. Notably, this is the sharpest pace of growth witnessed in the last three and a half years. Further, it comes after the sluggish 0.5% pace registered during the first quarter.
Since the factors that created this spurt in spending remain firmly in place, investing in retail stocks that are likely to trump estimates will be a smart move. This is because a stock generally picks up steam on an earnings beat.
Likely 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.
5 Prominent Picks
Investors can count on Ross Stores, Inc. (ROST - Free Report) , which operates off-price retail apparel and home fashion stores. The company delivered an average positive earnings surprise of 6.4% in the trailing four quarters. It has a long-term earnings growth rate of 10%. The Zacks Consensus Estimate for the quarter is pegged at $1.00. The company, which is scheduled to announce second-quarter fiscal 2018 results on Aug 23, has an Earnings ESP of +2.72% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Gap, Inc. (GPS - Free Report) , which is expected to report second-quarter fiscal 2018 results on Aug 23, is also a solid bet with a long-term earnings growth rate of 9%. The Zacks Consensus Estimate for the quarter under review is pegged at 72 cents. The company delivered an average positive earnings surprise of 3.4% in the trailing four quarters. This apparel retailer has an Earnings ESP of +2.52% and a Zacks Rank #2.
You may also consider Macy's, Inc. (M - Free Report) with a Zacks Rank #2 and an Earnings ESP of +0.21%. The Zacks Consensus Estimate for the quarter is pegged at 48 cents. The company delivered an average positive earnings surprise of 16.5% in the trailing four quarters. It has a long-term earnings growth rate of 8.5%. This department store retailer is scheduled to come out with second-quarter fiscal 2018 financial numbers on Aug 15.
Foot Locker, Inc. (FL - Free Report) , with a Zacks Rank #2 and an Earnings ESP of +5.30%, also deserves a place in your portfolio. The Zacks Consensus Estimate for the quarter is pegged at 71 cents. The company has delivered positive earnings surprises in the preceding three quarters. It has a long-term earnings growth rate of 6.6%. This athletic shoes and apparel retailer is expected to come out with second-quarter fiscal 2018 results on Aug 24.
Another lucrative option is Nordstrom, Inc. (JWN - Free Report) provider of apparel, shoes, cosmetics, and accessories. The stock has a Zacks Rank #3 and an Earnings ESP of +0.27%. The Zacks Consensus Estimate for the quarter is pegged at 83 cents. The company registered an average positive earnings surprise of 7.4% in the trailing four quarters. It has a long-term earnings growth rate of 6%. The company is slated to announce second-quarter fiscal 2018 results on Aug 16.
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