US Consumer Confidence Overrides Shaky Global Economy - Analyst Blog
Consumer confidence – a key determinant of the economy’s health – improved significantly, reaching a new height this January since August 2007. This implies better prospects for the U.S. economy in spite of overseas turmoil. We expect this positive sentiment to propel consumer spending, which accounts for over two-thirds of U.S. economic activity.
According to recent Conference Board data, the Consumer Confidence Index increased to 102.9 in January from 93.1 in December. A recovery in the housing market, the strengthening manufacturing sector and an improving labor market played major roles in raising buyers’ confidence. These indicate that the economy is gaining traction.
As many as 252,000 jobs were created in December, and the unemployment rate is lingering around 5.6%, its lowest level in six years, according to the Bureau of Labor Statistics. The improved jobs report confirms that the U.S. economy’s fundamentals are strong enough to sustain the momentum. Moreover, with new home sales advancing 11.6% to a seasonally adjusted 481,000 units in December, according to the U.S. Commerce Department, also resonates the same.
Although the U.S. economy looks quite stable, the year 2015 started on a cautious note with investors skeptical about political and economic woes around the world. This is because of a beleaguered Russian economy, softness in the European financial system and the ambiguity in China that raised concerns in the big financial houses.
The Russian economy is muddled by sliding oil prices, currency devaluation, the Ukrainian crisis and western sanctions, while the European economy crumbled due to its long-time sovereign debt crisis. However, the European Central Bank’s monetary stimulus announcement is a step towards restoring confidence. Coming to China, the economy is stressed by a slump in real estate, heavy debt load across companies and government bodies, industrial overcapacity and high dependence on investment and exports. Quite clearly, the Chinese government’s attempts of a facelift by shifting to a consumption driven model are yet to pay off.
The International Monetary Fund (“IMF”) trimmed its global growth forecast to 3.5% for 2015 from 3.8%, while the World Bank lowered its projection for this year to 3% from 3.4%, as the sharp drop in oil prices failed to tide over the all-pervasive softness. IMF also revised its forecast for 2016 to 3.7%, 30 basis points lower than what was projected before. Waning investments, sluggish trade and plummeting commodity prices compelled economists to adopt a conservative approach.
With an unconvincing global economy, all eyes are on the U.S. which looks set to steer the wheel. The IMF also seems upbeat despite global shakiness and expects the U.S. economy to grow 3.6% in 2015.
With the rebounding economy, falling unemployment rate and gasoline prices, higher consumer confidence and improving consumer spending, the retail space is bubbling with optimism. Here we have highlighted 3 favorably ranked Retail/Wholesale stocks ready to ride on the confidence exuded by consumers.
Prominent Picks
We suggest investing in Burlington Stores, Inc. (BURL), retailer of branded apparel products in the U.S. The stock holds a Zacks Rank #1 (Strong Buy) and has jumped 89% in the past one year. Though the stock looks pricey with a forward P/E (price-to-earnings) multiple of 30.00, it should not disappoint investors given the company's long-term expected earnings growth rate of 32.8%. This Burlington, NJ based company delivered an average positive earnings surprise of 27% over the trailing four quarters. The company is expected to register twofold earnings growth in fiscal 2014 and 30.2% in fiscal 2015.
Another stock that investors may look forward to is The Kroger Co. (KR) – one of the nation’s largest grocery retailers with a Zacks Rank #2 (Buy). The stock trades at a forward P/E of 20.56x, a premium to the industry average but still looks attractive from an earnings growth perspective. The company has a long-term earnings growth rate of 11.5% and has posted an average positive earnings surprise of 6.3% over the trailing four quarters. Shares of this Cincinnati, OH based company surged 96.6% in the past one year. The company is expected to register earnings growth of 18.4% in fiscal 2014 and 9.4% in fiscal 2015.
ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA), operator of specialty retail stores of branded and private label beauty products in the U.S., is another stock to bet on. The stock carries a Zacks Rank #2 and the company has a long-term earnings growth rate of 19%. Although the stock trades at a forward P/E of 34.97x, a premium to the industry average, it still looks attractive from an earnings growth perspective.
Shares of this Bolingbrook, IL based company have rallied 63.4% in the past one year. The company registered an average positive earnings surprise of 7.6% over the trailing four quarters. It is expected to witness earnings growth of 22.9% in fiscal 2014 and 15.7% in fiscal 2015.
We believe that the stocks above boast strong fundamentals and growth prospects that can satisfy investors’ appetite for equity market winners.
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KROGER CO (KR): Free Stock Analysis Report
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BURLINGTON STRS (BURL): Free Stock Analysis Report
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