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Consumer Spending Rises the Most in Nearly 10 Years: 5 Picks

Swarup Gupta
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After a sluggish start to the year, personal consumption expenditures soared in March. Personal income also increased modestly while inflation remained below the Fed target. This new report from the Department of Commerce provides fresh evidence that the economy is gaining momentum in the second quarter.

Data on retail sales released earlier this month revealed that the metric had experienced its largest increase in 18 months in March. This report also hinted that the economy is gathering steam as the year is progressing.

Recently released data on durable orders and new home sales have also been extremely encouraging. This is why it makes sense to add consumer discretionary stocks to your portfolio at this time.

Highest Increase in Nine and a Half Months

In March, consumer spending increased by 0.9%. This was the largest monthly increase registered since August 2009. Last month’s surge was primarily driven by higher spending on motor vehicles and healthcare. In February, personal consumption expenditures increased by 0.1%.

Additionally, January’s initially reported increase of 0.1% was revised upward to reflect an increase of 0.3%. Adjusting for inflation, consumer spending increased 0.7% in March after remaining flat in February.

The rise in real consumer spending allays fears of a slowdown in consumption, suggesting instead that a pickup is likely in the second quarter. These concerns were triggered by the latest GDP report which revealed that consumer spending increased 1.2% in the first quarter, the slowest pace recorded in a year.

Inflation Flat; Retail Sales, Durable Orders Raise Optimism

Inflation levels remained sluggish in March while core PCE inflation remained flat. This is the lowest pace registered since September 2017 and brings the yearly rate down to 1.6% from 1.7% in February. This is the smallest yearly increase since January 2018. 

Since the core PCE inflation index is well below the Fed’s target of 2%, this latest reading more or less rules out a near-term change in rates. Personal income registered a modest 0.1% increase following a 0.2% gain in February.

Even this moderate growth in income suggests that consumer spending is likely to remain firm in the second quarter, supported by a strong labor market and steady wage gains.

Incidentally, retail sales also posted their largest increase in 18 months in March, giving further credence to forecasts of a pickup in consumption in the second quarter. Meanwhile, durable goods orders increased by 1.3% in March, rising the maximum in eight months.

Also, new home sales increased 4.5% to a 16-month high in March. The strength of these metrics led New York Federal Reserve’s Nowcast model to increase its projection for second-quarter GDP growth from 1.92% to 2.08% on Apr 26.

Our Choices

The surge experienced in consumer spending witnessed last month provides fresh evidence that the economy is gathering steam in the second quarter. Moderate income growth and sluggish inflation are backing the trend.

And consumers’ spending power is being supported by a robust labor market and steady wage gains. This is why it makes sense to invest in consumer discretionary stocks. However, picking winning stocks may prove to 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 based on a good Zacks Rank and VGM Score.

G-III Apparel Group, Ltd. GIII is a manufacturer, designer and distributor of apparel and accessories under licensed brands, owned brands and private label brands.

G-III Apparel has a Zacks Rank #1 (Strong Buy) and VGM Score of A. The company has expected earnings growth of 15.3% for the current year.

Carter's, Inc. CRI is the largest marketer of branded apparel and related products for babies, and young children in North America.

Carter's has a Zacks Rank #1 and VGM Score of A. The company has expected earnings growth of 5.6% for the current year.

Rent-A-Center, Inc. RCII is the largest rent-to-own operator in the United States offering durable goods such as consumer electronics, appliances, computers, furniture and accessories.

Rent-A-Center has a VGM Score of B. The company has expected earnings growth of 80% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the past 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ralph Lauren Corporation RL is a major designer, marketer and distributor of premium lifestyle products.

Ralph Lauren has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 8% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the past 30 days.

Comcast Corporation CMCSA is a global media and technology company with three primary businesses: Comcast Cable, NBCUniversal and Sky.

Comcast has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 12.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.7% over the past 30 days

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Comcast Corporation (CMCSA) : Free Stock Analysis Report
 
Rent-A-Center, Inc. (RCII) : Free Stock Analysis Report
 
Carter's, Inc. (CRI) : Free Stock Analysis Report
 
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G-III Apparel Group, LTD. (GIII) : Free Stock Analysis Report
 
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