4 Top Consumer Discretionary Stocks to Buy Ahead of Earnings
The coronavirus-stricken first-quarter 2020 earnings season is underway. Economic disaster caused by the pandemic has taken a significant toll on corporate earnings. Despite the negative earnings trend, a few consumer discretionary stocks are poised to beat earnings estimates this month.
Disappointing First-Quarter Earnings Results So Far
As of May 1, 277 S&P 500 members reported first-quarter 2020 earnings results. Total earnings of these companies are down 12.6% from the same period last year on 2.1% higher revenues. Of the total, 68.6% surpassed EPS estimates and 63.9% outpaced revenue estimates. Overall, first-quarter earnings for the S&P 500 Index were projected to be down 12.5% year over year on 2.1% higher revenues. This is in sharp contrast to 4% earnings growth expected in early January. (Read More: Tech Sector Shows its Earnings Power)
Importance of Earnings Beat by Consumer Discretionary Stocks
The consumer discretionary sector comprises businesses that sell goods and services, which are considered non-essential by consumers. These are the products that consumers can avoid without any major consequences to their well-being. In fact, these goods are desirable only if the income of an individual is sufficient to purchase them. This is in sharp contrast to consumer staples products that are absolutely necessary.
Consequently, consumer discretionary products suffer during a sharp economic downturn and witness strong demand during the recovery and booming phase of a business cycle. Notably, the U.S. as well as the global economy was almost at a standstill in the second half of the first quarter due to partial or full lockdowns and complete breakdown of the global supply-chain.
As a result, when any consumer discretionary company is set to beat earnings estimates, it generally indicates an established business model, strong prospects and solid financial strength.
Our Top Picks
We have narrowed down our search to four consumer discretionary stocks. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and has a positive Earnings ESP. You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with the combination of a Zacks Rank #3 or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are expected to soar after earnings release. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The chart below shows the price performance of our four picks in the last quarter.
Activision Blizzard Inc. ATVI develops and distributes content and services on video game consoles, personal computers and mobile devices in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. It operates through three segments: Activision Publishing Inc., Blizzard Entertainment, Inc. and King Digital Entertainment. The Zacks Rank # 2 company has an Earnings ESP of +10.39% for first-quarter 2020.
Activision Blizzard has an expected earnings growth rate of 10.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 60 days. It has a trailing four-quarter positive earnings surprise of 25.2%, on average. The company is set to release earnings results on May 5, after the closing bell.
Electronic Arts Inc. EA develops, markets, publishes, and distributes games, content, and services for game consoles, PCs, mobile phones and tablets worldwide. The Zacks Rank # 1 company has an Earnings ESP of +4.41% for the fourth quarter of fiscal 2020.
Electronic Arts has an expected earnings growth rate of 5% for the current year (ending March 2021). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 60 days. The company is set to release earnings results on May 5, after the closing bell.
Reynolds Consumer Products Inc. REYN produces and sells products in cooking, waste and storage, and tableware product categories in the United States and internationally. It operates through four segments: Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware, and Presto Products. The Zacks Rank # 2 company has an Earnings ESP of +1.35% for first-quarter 2020.
Reynolds Consumer Products has an expected earnings growth rate of 22.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.3% over the last 60 days. The company is set to release earnings results on May 7, before the opening bell.
Take-Two Interactive Software Inc. TTWO develops, publishes, and markets interactive entertainment solutions for consumers worldwide. The company offers its products under the Rockstar Games and 2K labels, as well as under Private Division and Social Point labels.
The Zacks Rank # 2 company has an Earnings ESP of +13.24% for the fourth quarter of 2020. It has a trailing four-quarter positive earnings surprise of 180.5%, on average. The company is set to release earnings results on May 20, after the closing bell.
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