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4 Great Retail Stocks to Buy Ahead of Q1 Earnings

Swarup Gupta

American retail is experiencing radical transformation. Digital players are expanding their footprint every passing day. On the one hand, traditional retailers are looking to strike a balance between offline and online presence, extending their life span in the process.

But the sector remains vibrant overall, with retail sales posting their largest increase in 18 months in March. The sector’s stocks have also posted strong gains year to date after suffering a disastrous 2018.

With the economy remaining strong and the job market continuing to be bullish, retail remains a good investment option. This is why it is a good idea to pick up select stocks from the sector that are likely to outperform their earnings estimates.

Economic Fundamentals Powering Retail

Retail sales for March increased by 1.6% — the sharpest since September 2017. This was significantly higher than the consensus estimate of an increase of 0.9% and represents a rebound from February’s decline of 0.2%. (Read: Retail Sales Witness Largest Increase in 18 Months: 5 Picks)

Powering such strong sector-wide gains are America’s robust economic fundamentals. U.S. GDP increased at 3.2% in the first quarter of 2019, exceeding the consensus estimate of 2.1% by a wide margin. This is the first time since 2018 that first-quarter GDP has breached the 3% barrier. (Read: 5 Consumer Discretionary Stocks to Buy as Q1 GDP Surges)

Further, last month, the unemployment rate declined from 3.8% to 3.6%. This is the lowest level registered since December 1969. The economy added 263,000 jobs in April, significantly higher than the consensus estimate of 189,000. This marks the 100th consecutive month of job growth for the U.S. economy. (Read: Unemployment Hits 50-Year Low: 6 Business Services Picks)

Q1 Earnings Prospects Healthy

Combining the actual results that have come out up to May 3 from 388 S&P 500 members with estimates for still-to-come companies, total earnings for the first quarter are expected to be up 0.1% from the same period last year on 4.6% higher revenues.

But total Q1 earnings for the sector are expected to be up 9.7% on 7.5% higher revenues. This represents a considerable decline in pace, but is still better than oil, technology and construction. Earnings growth for these sectors is set to decline 19.3%, 7.3% and 2.9%, respectively. (Read: Three Takeaways from the Q1 Earnings Season)

Further, first-quarter earnings growth for retail stocks is second only business services, which is expected to reflect a 12.1% spurt in profits. Overall retail stocks are having a strong year after a torrid 2018. Last year, the SPDR S&P Retail ETF (XRT) declined more than 10%. In contrast, the XRT is already up 9.1% year to date.

Our Choices

Even as the sector undergoes a major transformation, retail stocks have enjoyed strong gains this year. Strong economic fundamentals are powering the American consumers’ purchasing power, which in turn is boosting retail sales. Meanwhile, the sector’s earnings prospects remain exceptionally strong.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

The Children's Place, Inc. PLCE is a pure-play children's specialty apparel retailer.

Powered with the right combination of the two key ingredients — an Earnings ESP of +9.96% and a Zacks Rank of 1 — our proven model shows that an earnings beat is expected for Intuitive Surgical in the to-be-reported quarter.

The company is expected to report first-quarter 2019 results on May 16.

Target Corporation TGT operates as a general merchandise retailer in the United States.

An Earnings ESP of +0.42% and a Zacks Rank of 2 raise chances of an earnings beat for Target in the to-be-reported quarter as well.

The company is expected to report first-quarter 2019 results on May 22.

Ulta Beauty Inc. ULTA is a leading beauty retailer in the United States.

Ulta Beauty beat the Zacks Consensus Estimate for earnings in the last four quarters, with an average positive earnings surprise of 2.7%.

An Earnings ESP of +0.25% and a Zacks Rank of 2 raise the odds of an earnings beat for Ulta Beauty this time around.

The company is expected to report first-quarter 2019 results on May 30.

Dollar Tree, Inc. DLTR is an operator of discount variety stores offering merchandise at a fixed price point of $1.00.

With an Earnings ESP of +0.51% and a Zacks Rank of 2, we can predict an earnings beat for Dollar Tree this reporting cycle.

The company is expected to report first-quarter 2019 results on May 30.

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Children's Place, Inc. (The) (PLCE) : Free Stock Analysis Report
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