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U.S. Economy Steps Up: Add 3 Retail Stocks to Shopping List - Earnings ESP

Gradual recovery in the housing market, strengthening manufacturing sector and improving labor market have abated fears of a derailed U.S. economy that intensified after the first-quarter 2014 GDP data revealed that the economy shrunk by a revised 2.1%. The economy swung to a growth trajectory in the second quarter, increasing 4%, according to the "advance estimate" by the Bureau of Economic Analysis.

The market is cheerful again on favorable economic numbers. So far this year, The Dow Jones Industrial Average, Standard & Poor's 500 and NASDAQ Composite indices gained 0.8%, 5.7% and 6.2%, respectively, shedding uncertainty in economic recovery. At the close of the last trading day, the Dow Jones Industrial Average gained 16.05 points (or 0.10%) to reach 16,569.98, the S&P 500 Index advanced 5.33 points (or 0.28%) to 1,936.92, while the Nasdaq Composite Index jumped 30.43 points (or 0.70%) to 4,401.33.

The overall economy looks a lot convincing now with the Federal Reserve continuing to scale down the monthly bond buying campaign, indicating rebounding economic activities. The purchase of mortgage-backed securities and Treasury securities reduced for the sixth time to $25 billion in August from $35 billion in July. Looking back, the Federal Reserve had initiated a monthly stimulus program of $85 billion to boost economic growth and keep interest rates low.

On the other hand, consumer confidence - a key determinant of the economy's health - has shown improvement. A recent Conference Board data suggested that Consumer Confidence Index increased to 90.9 in July from 86.4 in June. What is inspiring consumer confidence is an improved job prospect, which in turn is leading to higher consumer spending.

Although unemployment rate inched up 6.2% in July from 6.1% in June, the drop in unemployment rate in past one year has been very impressive, with the current level being down from 7.3% in July 2013. Boosting the sentiment was the total non-farm payroll data which indicated that the economy created 209,000 jobs in July. This is the sixth consecutive month that employment has increased more than 200,000. National Employment Report released by Automatic Data Processing stated that the U.S. private sector added 218,000 jobs in July.

Again, consumer spending - which accounts for over two-thirds of U.S. economic activity - climbed 2.5% in the quarter. This indicates that the economy is gaining traction.

The year ahead looks promising for retailers as stock prices gain momentum, the employment picture improves and consumer confidence moves north. This would help the retail stocks take center stage. Given its wide spectrum, the Retail/Wholesale sector remains a lucrative investment opportunity, and identifying the future winners from the sector would be a prudent idea before taking an investment decision.

The Future Winners among the Crowd

Picking the best stocks from the Retail/Wholesale space for one's portfolio is a fairly simple task. One way to narrow down the list of choices during this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Zacks Earnings ESP .

Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

For investors seeking to apply this strategy to their portfolio, we have highlighted 3 Retail/Wholesale stocks that may stand out this earnings season:

J. C. Penney Company, Inc. ( JCP ) is a Zacks Rank #2 stock having an earnings ESP of +14.14%. The current Zacks Consensus Estimate for second-quarter fiscal 2014 is a loss of 99 cents a share, portraying an improvement of 54.2% from the prior-year period. This Plano, TX based department store retailer registered positive earnings surprise of 8.7%, 13.9% and 2.7% in the preceding three quarters. The company is scheduled to report on Aug 14.

Macy's, Inc. ( M ) is a Zacks Rank #3 stock with an earnings ESP of +1.16%. The current Zacks Consensus Estimate for second-quarter fiscal 2014 is pegged at 86 cents a share, reflecting an increase of 20% year over year. This Cincinnati, OH based department store retailer registered an average positive earnings surprise of 6% over the trailing four quarters, and has a long-term earnings growth rate of 13%. The company is slated to report on Aug 13.

GameStop Corp. ( GME ) is a Zacks Rank #3 stock with an earnings ESP of +10.53%. The current Zacks Consensus Estimate for second-quarter fiscal 2014 is pegged at 19 cents a share, reflecting an increase of 110.1% year over year. This Grapevine, TX based retailer of software, hardware, and game accessories for video game systems and personal computers, had registered an average positive earnings surprise of 42.5% over the trailing four quarters, and has a long-term earnings growth rate of 15.6%. The company is slated to report on Aug 21.

Bottom Line

We believe that the above stocks with strong fundamentals and growth prospects are capable of quenching investors' thirst. Your portfolio's chance of giving you higher returns increases, if you have a favorably ranked stock powered by the optimism of an earnings beat in the quarter.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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