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5 Picks Ahead of Q2 Earnings on Soaring Consumer Confidence

Nalak Das

On Jul 30, the Conference Board released U.S. consumer confidence data for the month of July. Despite the lingering trade dispute with China and growing concerns about a global economic slowdown, U.S. consumers are highly confident about future growth, much to the surprise of economists.

A robust jobs market, higher consumer spending, low inflation rate and a likely rate cut by the Fed in July are expected to push up consumer confidence in the months to come. Finally, a blockbuster performance by Wall Street so far in 2019 also elevated consumers’ wealth and confidence in the economy.

Consumer Confidence Skyrockets in July

For July 2019, the Conference Board's measure of consumer confidence index stands at 135.7 compared with 124.3 in June. July’s reading is near the 18-year high of 137.9 recorded in October 2018 and above the consensus estimate of 126. The Present Situation Index, which gauges consumers’ views on current market conditions, climbed from 164.3 to 170.9.

More importantly, the Expectations Index, which is a measure of consumers’ short-term (for next six months) outlook for income, business and labor market conditions, surged to 112.2 from 97.6. Both Present Situation and Expectation indexes currently stand close to the highest levels in 18 years. Individuals stating business conditions as “good” increased from 37.5% to 40.1%, while people saying business conditions are “bad” rose slightly from 10.6% to 11.2%.

Consumer Spending Drives Better-Than-Expected Q2 GDP

On Jul 26, the Bureau of Economic Analysis reported that U.S. GDP grew 2.1% in second-quarter 2019, surpassing the consensus estimate of 1.8%. The most important positive feature of second-quarter GDP is that personal consumption expenditure jumped 4.3%, the highest since the fourth quarter of 2017, after growing a mere 1.1% in the previous quarter. Consumer spending grew on new cars and trucks, food and drinks, and clothing.

Moreover, government consumption expenditures and gross investment increased 5%, reflecting its fastest pace since the second quarter of 2009. Hike in federal outlay after the end of a record 35-day partial government shutdown, which significantly affected the first quarter, has given a major boost to the second quarter.  

Notably, personal consumption expenditure constitutes nearly 70% of U.S. GDP. A robust labor market, which added 172,000 jobs per month on average in the first half of 2019, a record-low unemployment rate of 3.7%, and gradual increase in wage rate are likely to sustain U.S. consumer expenditure, thereby eliminating the chance of a recession any time soon.

U.S. Economy to Hold Momentum

With the advent of July 2019, the U.S. economy officially entered into the longest stretch of expansion at least since 1854. Although the pace of economic growth has fallen, it can still amply deliver.

Moreover, the Fed, which is currently going through its two-day FOMC meeting, is likely to announce a rate cut today (Jul 31). In June, Fed chair Jerome Powell expressed his concerns about declining business expenditure and slowing global growth.

A drop in the benchmark lending rate, which is currently at 2.25-2.5%, will provide cheaper funds to businesses for investment. As of Jul 30, per the CME FedWatch, 78.1% respondents expect a rate cut of 25 basis points, while 21.9% expects half a percentage cut.     

Our Top Picks

Strong consumer confidence data indicates that consumer spending is likely to witness robust growth in the coming months. Consequently, adding consumer discretionary and retail stocks to your portfolio makes sense at this point.

We have narrowed down our search to five such stocks, each with either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and 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%.

The chart below shows price performance of our five picks year to date.

Boot Barn Holdings Inc. BOOT is a lifestyle retail chain that operates specialty retail stores in the United States. The company's specialty retail stores offer western and work-related footwear, apparel, and accessories for men, women and kids. The stock sports a Zacks Rank #1.

Boot Barn has an Earnings ESP of +7.33% for the current quarter. The company has an expected earnings growth rate of 40% and 12.6% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current year improved 0.7% over the last 30 days.

The company delivered positive earnings surprise in the last four quarters with an average beat of 19.2%. Boot Barn is expected to release earnings results on Jul 31, after the closing bell.  

The Habit Restaurants Inc. HABT specializes in offering made-to-order char-grilled burgers and sandwiches featuring choice tri-tip steak, grilled chicken, and sushi-grade tuna cooked over an open flame; and salads, as well as sides, shakes, and malts. The stock flaunts a Zacks Rank #1.

The Habit Restaurants has an Earnings ESP of +3.45% for the current quarter. The Zacks Consensus Estimate for the current quarter improved 20% over the last 30 days. The company delivered positive earnings surprise in three out of the last four quarters with an average beat of 163.9%. The Habit Restaurants is expected to release earnings results on Jul 31, after the closing bell.  

BJ's Wholesale Club Holdings Inc. BJ operates as a warehouse club on the East Coast of the United States. It offers perishable, edible grocery, general merchandise, and non-edible grocery products. The stock sports a Zacks Rank #1.

BJ's Wholesale Club has an Earnings ESP of +21.05% for the current quarter. The company has an expected earnings growth rate of 22.6% and 12.8% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current quarter and year improved 2.7% and 1.4%, respectively, over the last 30 days.

The company delivered positive earnings surprise in the last four quarters with an average beat of 13.9%. BJ's Wholesale Club is expected to release earnings results on Aug 27.

SeaWorld Entertainment Inc. SEAS operates as a theme park and entertainment company in the United States. The company operates SeaWorld theme parks in Orlando, FL; San Antonio, TX; and San Diego, CA, as well as Busch Gardens theme parks in Tampa, FA, and Williamsburg, VA. The stock carries a Zacks Rank #2.

SeaWorld Entertainment has an Earnings ESP of +11.01% for the current quarter. The company has an expected earnings growth rate of 52.9% and 188.5% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current year improved 1.4% over the last 30 days.

The company delivered positive earnings surprise in the last four quarters with an average beat of 35.6%. SeaWorld Entertainment is expected to release earnings results on Aug 6, before the opening bell.

Ulta Beauty Inc. ULTA operates as a beauty retailer in the United States. The company's stores offer cosmetics, fragrances, skincare and haircare products, bath and body products, and salon styling tools, salon services including nail products and accessories. The stock carries a Zacks Rank #2.

Ulta Beauty has an Earnings ESP of +0.16% for the current quarter. The company has an expected earnings growth rate of 13.4% and 19.4% for the current quarter and year, respectively. It delivered positive earnings surprise in the last four quarters with an average beat of 1.4%. Ulta Beauty is expected to release earnings results on Aug 29.

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SeaWorld Entertainment, Inc. (SEAS) : Free Stock Analysis Report
 
BJ's Wholesale Club Holdings, Inc. (BJ) : Free Stock Analysis Report
 
The Habit Restaurants, Inc. (HABT) : Free Stock Analysis Report
 
Ulta Beauty Inc. (ULTA) : Free Stock Analysis Report
 
Boot Barn Holdings, Inc. (BOOT) : Free Stock Analysis Report
 
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