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American Consumers & Factories Strengthen Q2 View: 5 Gainers

Tirthankar Chakraborty

The Fed is widely expected to cut interest rates in order to mitigate the ill effects of the ongoing trade dispute and global economic slowdown. Despite such challenges, the economy continues to show signs of strength. American shoppers increased their spending levels significantly last month and factories ramped up production, adding to evidence that it has been a strong second quarter.

Thus, it’s time to invest in stocks that can make the most of the positive second-quarter economic outlook.

Retail Sales Pop in June

Consumer spending generally fuels more than two-thirds of economic output. Sales at U.S. retailers that measure outlays at stores, online-shopping websites and restaurants increased at a seasonally adjusted rate of 0.4% in June from a month earlier, pointing to a strong rebound in consumer spending in the second quarter, per the Commerce Department. It also shows that the economy is not as fragile as the Fed seems to believe. And when compared to last June, retail sales jumped 3.4%. Meanwhile, sales at retailers rose at a healthy clip of 0.4%, both in April and May.

The so-called core retail sales that exclude food services, auto dealers, building materials stores and gasoline stations rose 0.7% in June, following an upwardly revised 0.6% increase in May. The core retail sales figure is seen as a more reliable gauge of underlying consumer demand.

Retail sales were mostly broad-based, with Americans increasing spending online, where outlays were up 13.4% compared to year-ago levels and 1.7% from May. Consumers also spent heavily at clothing stores, restaurants and building-material supply outlets.

The uptick in consumer spending was buoyed by higher income levels and consumer confidence. More than these, strong hiring and low layoffs are boosting spending levels. The United States added 224,000 jobs last month, way higher than analysts’ expectations of 170,000 jobs.

Unemployment rate, by the way, edged up to 3.7% from 3.6% but is still near a 50-year low. The U-6 rate ticked up to 7.2%. However, the rate of underemployment rate is below where it was a few years back (read more: U.S. Jobs Growth Roars Back: Winners & Losers).

Joseph Brusuelas, chief economist at RSM US LLP, pointed out that strong spending at restaurants and online shows consumers’ financial stability to tackle economic uncertainties from overseas. He added that “consumers have a fairly bright outlook at this point, just based on job gains and wage gains.”

Factory Output Accelerates in June

U.S. factory output increased at the fastest pace this year in June banking on an uptick in automotive sector production. According to Fed data, manufacturing output increased 0.4% last month after rising 0.2% in May. Most of the gains came from the motor vehicles and parts segment, which posted a substantial increase of nearly 3%.

The Fed said that “an increase of nearly 3% per cent for motor vehicles and parts contributed significantly to the gain in factory production; excluding motor vehicles and parts, manufacturing output moved up 0.2%.”

Other sectors that saw gains included petroleum and coal products, and computer and electronic products. Some critics, by the way, may say that the overall industrial production remained unchanged in June. But, that was purely due to lackluster performance by the utilities sector as “milder-than-usual temperatures” hurt demand for air conditioning. Nonetheless, it can be concluded that American manufacturing is regaining foothold despite trade concerns and a global economic slowdown.

5 Top Picks

Strong retail sales and an increase in manufacturing output in June, surely indicate a stronger-than-expected second quarter economic growth. Hence, it will be prudent to invest in stocks from the aforesaid categories that are showing immense strength. Such stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Aaron’s, Inc. AAN operates as an omnichannel provider of lease-purchase solutions to underserved and credit-challenged customers. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 0.8% over the past 60 days. The company’s expected earnings growth rate for the current year is nearly 14%, higher than the Retail - Consumer Electronics industry’s protected rise of 2.5%. The company has outperformed the broader industry on a year-to-date basis (+52.6% vs +32.9%).

Shoe Carnival, Inc. SCVL operates as a family footwear retailer in the United States. The company offers various dress, casual, and athletic footwear products for men, women, and children. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 3.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 13.1% compared with the Retail - Apparel and Shoes industry’s anticipated decline of 2%. The company has outperformed the broader industry over the past two-year period (+51.5% vs -15.9%).

Chipotle Mexican Grill, Inc. CMG operates Chipotle Mexican Grill restaurants. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 0.1% over the past 60 days. The company’s expected earnings growth rate for the current year is 43.5%, higher than the Retail - Restaurants industry’s projected rise of 5.6%. The company has outperformed the broader industry so far this year (+76.4% vs +26.5%). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lithia Motors, Inc. LAD operates as an automotive retailer in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved 7.3% up over the past 90 days. The company, which is part of the Automotive - Retail and Whole Sales industry, is expected to see earnings growth of 10.4% in the current year. The company has outperformed the broader industry so far this year (+56.4% vs +24.3%).

Ford Motor Company F designs, manufactures, markets, and services a range of Ford cars, trucks, sport utility vehicles, and electrified vehicles. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 0.7% over the past 60 days. The company’s expected earnings growth rate for the current quarter is 22.2%, higher than the Automotive - Domestic industry’s estimated rally of 10.6%.  The company has outperformed the broader industry on a year-to-date basis (+37.4% vs +7.5%).

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