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October Consumer Spending Highest in 7 Months: 5 Top Picks

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The U.S. economy is soaring high despite severe volatility in stock markets. Several key economic reports for the month of October and November have affirmed that the largest economy of the world is in good shape. The latest metric to reassert this notion is the massive jump in U.S. consumer spending in October.

Despite apprehensions regarding an impending global economic slowdown, U.S. consumers have increased their personal expenditures with holiday season just around the corner.  This can primarily be attributed to massive tax cut policies adopted by the Trump administration. At this stage, it will be a prudent move to invest in consumer discretionary stocks with a favorable Zacks Rank.

U.S. Consumer Spending Jumps in October

On Nov 29, the Department of Commerce reported that personal consumption expenditures increased $86.9 billion or 0.6% in October, highest in seven months. Strong expenditure on prescription drugs, electricity and natural gas propelled total consumer spending. The data was higher than the consensus estimate of an increase of 4%.

October data exhibited growing momentum for consumer spending which constitutes over 70% of U.S. GDP. This could be a signal for robust fourth-quarter GDP data. Notably, on Nov 15, the Department of Commerce reported that U.S. retail sales for the month of October rose 0.8%, exceeding the consensus estimate of 0.5%.

Inflationary Concerns Overblown

For the month of October, PCE (personal consumption expenditure) index grew 0.2%. Year-over-year, PCE inflation remained flat at 2%. The core PCE inflation (excluding food and energy) rose a modest 0.1%, lower than the consensus estimate of 0.2%. Year-over-year, core PCE inflation was 18%, well below the Fed’s target level of 2%. Notably, core PCE inflation is the preferred inflation gauge of the central bank.

Robust U.S. Economy and Labor Market

In its second estimate, the Department of Commerce confirmed on Nov 28 that the U.S. GDP for the third quarter of 2018 expanded by 3.5%. This implies that the U.S. economy increased 3.3% in the first nine months of 2018, surpassing the target of 3% set by President Trump.

On Nov 5, the Department of Labor reported that the U.S. economy added 250,000 non-farm jobs in October outpacing the consensus estimate of 193,000. Unemployment rate remained flat at 3.7%, the lowest since December 1969.

Our Top Picks

Solid economic fundamentals, tax reforms and sustained strong earnings performance are major tailwinds for the U.S. economy. Consequently, adding consumer discretionary stocks will be lucrative. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in handy. 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 five stocks, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

Rent-A-Center Inc. (RCII - Free Report) offers high-quality, durable products like consumer electronics, appliances, computers, furniture and accessories under flexible rental purchase agreements. The stock has a VGM Score of A. The company has expected earnings growth of more than 100% the for current year. The Zacks Consensus Estimate for the current year has improved by 1.2% over the last 60 days.

MasterCraft Boat Holdings Inc. (MCFT - Free Report) designs, manufactures and markets recreational powerboats through its subsidiaries. The stock has a VGM Score of B.  The company has expected earnings growth of 31% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.3% over the last 60 days.

The Marcus Corp. (MCS - Free Report) owns and operates movie theatres, and hotels and resorts. The stock has a VGM Score of B.  The company has expected earnings growth of 22.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.8% over the last 60 days.

Hudson Ltd. (HUD - Free Report) operates as a travel retail company in the United States and Canada. The stock has a VGM Score of A.  The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved by 13.9% over the last 60 days.

Hamilton Beach Brands Holding Co. (HBB - Free Report) operates in the consumer, commercial, specialty small appliance, and specialty retail market in the United States and internationally. The stock has a VGM Score of A.  The company has expected earnings growth of 21.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 60 days.

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