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5 Top Ranked Stocks to Buy as Consumer Spending Expands

Swarup Gupta

In a clear departure from previous months, data released on Thursday revealed that consumers had quickened spending substantially during the month of April. The recently released GDP report had underlined the economy’s problems during the first three months of the year. Given this backdrop, a pickup in consumer spending indicates that the economy has emerged from its first quarter chill and is ready to turn the corner.

During the previous month, all of the major expenditure categories experienced moderate to strong expansions. Shrinking supply in the labor market and subsequent wage gains is believed to be the reason behind these gains which makes it a great time to invest in consumer discretionary stocks.

Pace of Spending Hits 4-Month High

According to the Department of Commerce, consumer expenditure increased by 0.4% in April, in line with estimates. This was an improvement over the upwardly revised pace of 0.3% for the month of March. More importantly, it is the fastest pace of growth recorded since Dec 2016.

This notable increase in personal expenditure was accompanied by an even sharper increase in incomes. Personal income increased by 0.4% in April, twice as much as the 0.2% increase in March. Even as both expenditure and income increased last month, the savings rate remained flat at 5.3%. This metric has now remained unchanged for a third month in a row.

Tight Labor Market, Wage Gains Powering Gains

Economists across the board believe that the rise in spending is an outcome of a tightening labor market. This in turn has led to wage gains, which has boosted purchasing power significantly. Further evidence of an improving labor market was received from recently released initial claims data. Though jobless claims increased by 1,000 during the week ended May 20, the four week average declined to its lowest level in 44 years.

Meanwhile, the consumer confidence index declined from 119.4 in April to 117.9 in May. However, the survey’s labor market differential registered the second best reading in 16 years. This metric is derived using data from respondents who believe jobs are in abundance and those who think they are tough to secure.

Previously, it has also been utilized by Janet Yellen to gauge the unemployment rate. Leading economists believe that its current level should signify that the economy is nearing full employment. Needless to say, such a state of affairs will only spur further wage gains and consequently higher consumer expenditure.

Our Choices

Fresh data on consumer spending has signaled that discernible improvements are taking place on this front. A concurrent increase in income levels also bodes well for consumer discretionary items.

Investing in stocks benefiting from such trends looks like a prudent option at this point. However, picking winning stocks may be difficult.

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 (Strong Buy) stocks here.

Summer Infant, Inc. SUMR is a designer, marketer and distributor of branded durable juvenile health, safety and wellness products, which are sold principally to large U.S. retailers.

SP Plus has a VGM Score of A. The company has expected earnings growth of 42.9% for the current year. Its earnings estimate for the current year has improved by 11.1% over the last 30 days. The stock has returned 17% over the last one year, outperforming the Zacks Consumer Products - Discretionary industry, which has lost 4.7% over the same period.

SodaStream International Ltd. SODA is engaged in the manufacture, sale and distribution of home beverage carbonation systems

SodaStream has a VGM Score of A. The company has expected earnings growth of 21% for the current year. Its earnings estimate for the current year has improved by 7.5% over the last 30 days. The stock has returned 156.8% over the last one year, outperforming the Zacks Consumer Products - Discretionary industry, which has lost 4.7% over the same period.

The Marcus Corporation MCS is an owner and operator of hotels, resorts and movie theatres.

Marcus Corp has a VGM Score of A. The company has expected earnings growth of 21.3% for the current year. Its earnings estimate for the current year has improved by 1.5% over the last 30 days. The stock has returned 69.2% over the last one year, outperforming the Zacks Leisure And Recreation Services industry, which has gained 21.7% over the same period.

The Dixie Group, Inc. DXYN is a manufacturer, marketer and seller of floor covering products.

Dixie Group has a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 40% over the last 30 days. The stock has returned 24.3% over the last one year, outperforming the Zacks Textile - Home Furnishing industry, which has returned 20.4% over the same period.

Nutrisystem, Inc. NTRI is a leading provider of weight management products and services.

Nutrisystem has a VGM Score of B. The company has expected earnings growth of 37.4% for the current year. The stock has returned 86.6% over the last one year, outperforming the Zacks Consumer Products - Discretionary industry, which has returned 4.7% over the same period.

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