Last week, market participants were busy forecasting whether the Fed will raise the benchmark lending rate by 75 basis points or 1% in the upcoming FOMC meeting scheduled on Jul 26 and 27. The reason for this expected rate hike is the consumer price index data for June that soared 9.1% year over year.
Let’s sidetrack the issue of the expected rate hike in July here. A little bit of in-depth thinking clearly reveals that rock-solid U.S. aggregate demand is the primary reason for the spike in the inflation rate. At this stage, we should think about a contra strategy.
A higher interest rate is detrimental to consumer-centric stocks, especially consumer discretionary stocks. However, robust demand is likely to drive both the top and the bottom line of these companies. Consequently, investment in consumer discretionary stocks should be fruitful going forward.
We have selected five consumer discretionary stocks with a favorable Zacks Rank. These are — Nexstar Media Group Inc. NXST, Marriott Vacations Worldwide Corp. VAC, Yum! Brands Inc. YUM, Choice Hotels International Inc. CHH and Acushnet Holdings Corp. GOLF.
Rock-Solid U.S. Demand
The primary source of current inflation is supply-centric. The pandemic-led complete devastation of the glob al supply-chain system and shortage of labor are two major sources that injected inflation into the post-pandemic U.S. economy. However, it is strong demand that brought the momentum in inflationary pressure.
U.S. citizens have received unprecedented support in the form of both fiscal and monetary stimuli in the last-two coronavirus ridden years. However, Americans were unable to spend more due to pandemic-related lockdowns and other restrictions.
Once the rate of COVID-19 infections marginalized and state governments repealed restrictions, the U.S. economy witnessed a strong pent-up demand buoyed by nearly $1.5 trillion in savings.
This robust demand helped U.S. businesses to a large extent to shift higher input costs and wage rates to the prices of the final products. For example, retail sales increased 1% in June outpacing the consensus estimate of 0.9%. Moreover, May’s data was revised upward to a decline of 0.1% from a drop of 0.3% reported earlier.
Year over year, retail sales jumped 8.4% in June. The core retail sales (excluding auto) also rose 1% in June surpassing the consensus estimate of 0.7%. May’s data was revised upward to 0.6% from 0.5% reported earlier.
Our Top Picks
We have narrowed our search to five consumer discretionary stocks. These stocks have solid potential for the rest of 2022 and have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past month.
Image Source: Zacks Investment Research
Nexstar Media owns, operates, programs or provides sales and other services to television stations in the states of Illinois, Indiana, Maryland, Missouri, Montana, Texas, Pennsylvania, Louisiana, Arkansas, Alabama and New York. NXST’s television station group includes the affiliates of NBC, CBS, ABC, FOX and UPN.
Nexstar Media has an expected earnings growth rate of 36.5% for the current year. The Zacks Consensus Estimate for the current year has improved 1.3% over the last 60 days.
Marriott Vacations is a leading global vacation company that offers vacation ownership, exchange, rental, resort and property management services. VAC also has exchange networks and membership programs in a large number of resorts across countries. Marriott Vacations’ business is operated under two major segments: Vacation Ownership and Exchange & Third-Party Management.
Marriott Vacations has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 5.4% over the last 30 days.
YUM! Brands is the global leader in multi-branding and offers consumers more choice and convenience at one outlet. YUM presently reports through four segments - KFC, Pizza Hut, Taco Bell and Habit Burger Grill. Yum Brands now owns, operates and franchises restaurants in more than 150 countries and territories. YUM’s units were operated by independent franchisees or licensees under the terms of franchise or license agreements.
YUM! Brands has an expected earnings growth rate of 4.3% for the current year. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 30 days.
Choice Hotels is one of the largest hotel franchisors globally. CHH is spread out in more than 35 countries. Comfort Inn, Comfort Suites, Quality, Clarion, Clarion Pointe, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, WoodSpring Suites, Everhome Suites, Cambria Hotels, and Ascend Hotel Collection are Choice Hotels’ proprietary brand names.
Choice Hotels has an expected earnings growth rate of 17.5% for the current year. The Zacks Consensus Estimate for the current year has improved 1.6% over the last 7 days.
Acushnet Holdings designs, develops, manufactures and distributes golf products in the United States, Europe, the Middle East, Africa, Japan, Korea, and worldwide. GOLF operates through four segments: Titleist Golf Balls, Titleist Golf Clubs, Titleist Golf Gear and FootJoy Golf Wear.
Acushnet Holdings has an expected earnings growth rate of 16.8% for the current year. The Zacks Consensus Estimate for the current year has improved 0.7% over the last 60 days.
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Yum Brands, Inc. (YUM) : Free Stock Analysis Report
Choice Hotels International, Inc. (CHH) : Free Stock Analysis Report
Acushnet (GOLF) : Free Stock Analysis Report
Marriot Vacations Worldwide Corporation (VAC) : Free Stock Analysis Report
Nexstar Media Group, Inc (NXST) : Free Stock Analysis Report
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