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4 Top-Ranked Stocks to Buy on Strong Consumer Sentiment

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United Technologies' (UTX) Q1 earnings are likely to be driven by strong aerospace and aftermarket business. However, high operating expenses may hurt margins.

On Mar 3, The University of Michigan reported that its consumer sentiment gauge had increased in February to its second-highest level since 2004. This reflects that many American households are shrugging off renewed volatility in financial markets.

Expected gains in income, jobs and after-tax pay of U.S. consumers mostly offset worries about rising interest rates and stock market volatility. According to the University, "Modest hikes in interest rates will not cause postponement of discretionary purchases as long as wages and take-home pay continue to rise." Based on latest consumer confidence data, we believe this is the right time to invest in consumer discretionary stocks.

Robust February Data

The final reading of the University of Michigan’s consumer sentiment index for February was 99.7. Although this was lower than the initial reading of 99.9, it was far better than the January 2018 level of 95.7 and February 2017 level of 96.3.

The current conditions index, which is a gauge of Americans’ opinion about their finances, was 114.9 in February 2018, up from 110.5 in January 2018 and 111.5 February 2017. The overall number experienced a 4.2% increase from January’s figure of 95.7. Meanwhile, expectations for current year inflation levels remained unchanged at 2.9%.

Favourable Policy Changes

President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agenda items of Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the U.S. economy.  The proposal to reduce corporate taxes from their current rate of 35% to 20% is likely to bring corporate tax rate to its lowest level in 78 years.

Additionally, Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term as the President. Major proposals like a pledge to spend $1 trillion in infrastructure projects over a period of 10 years along with the above-mentioned policy changes are likely to spur higher consumer spending that may create about 25 million new jobs over a decade. This in turn will fuel long-term economic growth.

Momentum to Continue in 2018

American consumers are gradually gaining confidence in the economy. The U.S. economy has started to expand close to the 3% range as expected by Trump and some other Republicans, while both manufacturing and service sectors accelerated at a record pace over the last four months.

Upbeat corporate earnings have been instrumental in driving the S&P 500 index higher. Trump administration’s tax reform and deregulation proposals and sustained strong earnings performance are the factors fueling this ascent. Such factors are unlikely to disappear in the near term.

Our Top Picks

A considerable jump in consumer sentiment is only indicative of the extent to which the U.S. consumer’s purchasing power has increased. Adding consumer discretionary stocks to your portfolios makes great sense at this point. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.

MCBC Holdings Inc. MCFT: The company is a designer, manufacturer and marketer of MasterCraft brand premium performance sport boats. MCBC Holdings has a VGM Score of A. The company has expected earnings growth of 40.8% for current year. The Zacks Consensus Estimate for fiscal 2018 has improved by 13.7% over the last 30 days.

Deckers Outdoor Corp. DECK: The company is a leading designer, producer, and brand manager of innovative, niche footwear and accessories developed for outdoor sports as well as other lifestyle-related activities. Deckers has a VGM Score of A. The company has expected earnings growth of more than 5% for current year. The Zacks Consensus Estimate for fiscal 2018 has improved by 5.6% over the last 30 days.

American Public Education Inc. APEI: The company is an online provider of higher education focused primarily on serving the military and public service communities. American Public Education has a VGM Score of B. It has expected earnings growth of 15.5% for current year. The Zacks Consensus Estimate for current year has improved by 34.2% over the last 30 days.

Rocky Brands Inc. RCKY: The company is a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Rocky Outdoor Gear, Georgia Boot, Durango, Lehigh, and the licensed brand, Dickies. Rocky Brands has a VGM Score of B. It has expected earnings growth of 20.7% for current year. The Zacks Consensus Estimate for current year has improved by 19.7% over the last 30 days.

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