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3 Consumer Stocks Bringing in High Returns

The US has a consumer driven economy and taking a broad view, the consumers are happy. Per the Labor Department August jobs report, unemployment, at 3.7%, remains at 50-year low levels, wages are up 3.2% year-over-year, and overall GDP growth, at 2%, continues to outpace the estimates. Earlier US Commerce Department data showed an acceleration in consumer spending for July. In this environment, it makes sense to look for investment opportunities in the companies catering to consumer desires.

We’ve used TipRanks’ Trending Stocks tool to find three such openings for investors. We set the filters on the Trending Stocks tool to show us only companies in the Consumer Goods category. These retailers offer a wide variety of products on the open market: from high-end electronics to athletic apparel to discount home goods. We selected three stocks that hold Buy ratings from the consensus, have shown sustained growth so far this year, and boast recent gains in double digits. Wall Street’s top analysts have taken notice of them, as should we.

Apple, Inc. (AAPL)

Yesterday, CEO Tim Cook hosted his company’s new product release event, and his presentation shows that Apple (AAPLGet Report) is fully committed to pushing its Services division for higher revenues. The company announced that its new Arcade game subscription service will be priced at just $4.99 per month and will include a free one-month trial. Apple TV, soon to launch as a competitor to Netflix (NFLX Get Report) in the streaming space, will be priced at just $5.99, raising the possibility that Apple intends to ignite a price war among content streamers. And finally, Cook announced that the TV streaming service will be offered free for one year with new purchases of Apple hardware – a clear move toward monetizing the company’s 900 million strong installed user base.

On the hardware front, the new iPhone 11 models include faster processors, updated cameras, and lower pricing. Taken with the Services push, the conclusion is that Apple is serious about shifting its marketing strategies to maintain high profits as iPhone sales decline.

Since AAPL’s steep losses in last year’s second-half downturn, Apple has faced and beaten a number of headwinds. Falling sales in China, the ongoing US-China tariff disputes, and the lengthening smartphone replacement cycles have taken their toll on the company’s sales and revenues. To fight the difficult market environment, Apple has relied on a shift in strategy backed by over $200 billion in cash on hand. Deep pockets and smart management have given confidence to investors.

The confidence can be seen in share appreciation. Apple is up 41.7% year to date, 16.6% in the last 3 months, and 12.5% in the last 30 days. AAPL shares are currently trading just $4 below its all-time high value (adjusting for the 7:1 split in June 2014). Optimism in the company can also be seen in the analyst coverage.

Michael Walkley, of Canaccord Genuity, set the tone with this simple statement: “The Apple launch event met expectations as the company unveiled attractively priced products to drive its installed base growth.” His $240 price target suggests a 7.3% upside potential.

Needham’s Laura Martin went into greater detail, writing, “The company is continuing its transition to becoming an integrated content owner with captive hardware by driving more revenue per member and extending the life-span in its iOS ecosystem. The event also helped underscore Apple's efforts in creating an on-ramp into that ecosystem. Apple's broader range of iPhone prices, monthly payment plans, value in bundling Arcade and Apple TV offerings, as well as creating a content "price war" by pricing AppleTV+ at just $5 per month will put pressure on the competition.” Her price target of $250 indicates a potential 11.8% upside.

It’s important to note that Apple’s price surge, both before and after the launch event, has pushed the stock’s trading value above its average price target of $224. Since September 7, AAPL has gained 5.7% in price. The stock has a Moderate Buy from the analyst consensus, based on 32 ratings including 17 buys, 13 holds, and 2 sells.

Lululemon Athletica, Inc. (LULU)

The popular athletic wear manufacturer Lululemon (LULUGet Report) has become a hot seller, boosted by smart social media marketing and a solid online presence. Its success is underlined by its Q2 earnings report, in which the company reported 96 cents EPS, beating the 89-cent forecast by 7.8%. Revenues were up by 4.6%, at $883.35 million. It was the fourth quarter in a row that LULU had beaten EPS and revenue estimates.

Lululemon’s strong sales performance, maintained over time, matches its share price gains. LULU is up 11% in the last 30 days, capping a 61.5% year-to-date gain. Fast growth has been powered by moves into new categories, including men’s wear. The company’s men’s line gained 35% in the quarter.

Writing from Oppenheimer, analyst Brain Nagle said, “Better sales combined with further expansion in gross margins and tighter expense controls helped to fuel meaningful upside to earnings per share. By all measures, we view fundamental momentum at Lululemon as solidly intact.” Nagle’s price target of $225 suggests additional upside of 14% for the stock.

Also bullish on LULU is Michael Binetti, of Credit Suisse. He raised his price target by 18%, to $235, and wrote, “We are significantly impressed that Lululemon accelerated comps in an increasingly volatile macro environment and feel implied Q4 revenue guidance will prove very conservative.” Binetti’s new price target implies a 19% upside for LULU.

LULU’s analyst consensus is a Moderate Buy, derived from 17 buys and 9 holds set in the last three months. The $205 average price target suggests a 3.3% upside from the current share price of $198.

Dollar General Corporation (DG)

The increased tariff tensions between the US and China are making life hard for retailers, but Dollar General (DGGet Report) has shown that even heavily impacted retailers can cope. The company is a highly profitable discount retailer with a strong presence in rural areas. It sees over $25 billion in annual revenues.

Like Lululemon, Dollar General is gaining on a strong second quarter. The company’s Q2 earnings, released on August 29, showed a 10% EPS beat and an 8.4% year-over-year revenue gain. The final numbers were $1.74 in EPS, based on $6.98 billion in revenues. DG shares gained over 10% immediately after the earnings report, fitting for the fourth quarter in a row of above-forecast revenues.

The post-earnings gains put DG’s 30-day gain at 16.5%. The company’s year-to-date gain is 44.3%. Momentum is clearly on Dollar General’s side going into the fall. Investors and analysts are clearly confident in the company’s ability to continue performing.

Barclay’s Karen Short showed her upbeat view by raising her price target on DG to from $141 to $180. She wrote, “The company beat a high Q2 bar with a strong beat and raise, underscoring its industry leading execution and positioning in the dollar space.” Her new price target implies an upside potential of 15.3%.

From KeyBanc, Bradley Thomas also set a $180 price target. His comments on the stock are detailed and upbeat: “DG remains one of our top picks, positioning investors for growth and defensiveness. 2Q EPS was ahead of expectations, driven by better-than-expected sales, gross margin, and expense leverage. Management raised 2019 guidance, even considering elevated tariffs. We remain positive on the near-term and long-term opportunity ahead for DG, supported by generally consistent execution, numerous initiatives to drive growth, and management’s long-term focus.”

Overall, DG holds a Strong Buy from the analyst consensus, based on 15 recent buys and 3 holds. Shares are selling for $157 and the average price target of $168 suggests room for 7.1% upside.

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This author is long on AAPL.