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Consumers Remain Confident: Buy These 5 Top-Rated Picks

Swarup Gupta

The Consumer Confidence index rose in June, defying expectations of a decline. This comes as a welcome surprise for market watchers, who have received dismal tidings about the economy one after another, over the past few weeks. The most recent example of these reports is the one on durable orders released on Monday that triggered a flight to safer assets.

But consumer confidence data indicates that though consumers have adopted a cautious outlook, they remain optimistic about the economy’s fortunes. The Fed’s most recent pronouncements on these issues have also been positive, with both the Fed Chair and a key official weighing in on the necessity of rate hikes. This is why investing in stocks gaining from consumers’ optimism looks like a smart option at this time.

Consumer Confidence Bucks the Trend

Defying the spate of disappointing reports on the economy, the Consumer Confidence index rebounded to increase from 117.6 in May to 118.9 in June. The Present Situation Index also rose from 140.6 to 146.3. However, the Expectations Index slipped from the level of 102.3 recorded in May to 100.6. Meanwhile, consumers’ estimation of prevailing business conditions has also improved this month.

The Conference Board’s Director of Economic Indicators said that consumers’ outlook about the economy touched a near 16-year high in June. Additionally, even though consumers believe that the pace of growth may remain slow, they expect economic expansion to continue unhindered. Their plans to buy such capital goods as homes and automobiles remain unchanged. Meanwhile, plans to buy purchase major appliances have actually increased.

Strong Labor Market Powering Gains

A strong labor market is widely believed to be the primary reason for consumers’ continuing optimism. One of the most closely watched components of the consumer confidence report is a metric known as the labor market differential. This measure is derived using data from respondents who believe jobs are in abundance and those who think they are tough to secure. In May, the survey’s labor market differential registered the second best reading in 16 years. (Read: 5 Top Ranked Stocks to Buy as Consumer Spending Expands)

This metric has undergone a further improvement in June, increasing to 14.8 points. This is the highest level witnessed since Aug 2001. Previously, labor market differential 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.

Fed Officials Remain Cautious but Confident

Several Fed officials have expressed doubts over the need for a rate hike amid conflicting signals over the health of the economy. However, San Francisco Fed President John Williams snapped this chain of doubt on Monday, emphasizing the need to increase rates in a gradual manner. Quite like the Fed Chair, Williams thinks that recent disappointing data on inflation is transitory in nature.

Williams believes that inflation will hit the Fed’s 2% target by 2018. Fed Chair Janet Yellen also provided no indications about a change in the central bank’s approach on monetary policy. Yellen did emphasize the need for gradual rate hikes and acknowledged prohibitive asset valuations. But her stance remains one which is in favor of monetary tightening.

Our Choices

Data on consumer confidence indicates that the economy’s engine of growth, consumer spending, is likely to remain strong in the near future. A strong labor market is helping to boost consumers’ purchasing power.

With the economy at full employment and wage rises continuing at a steady pace, investing in consumer discretionary stocks seems to be a prudent option. 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 stocks here . 

H&R Block, Inc. HRB is a leading provider of tax preparation services. Through its subsidiaries, the company provides tax, accounting and business consulting services and products.

H&R Block has a VGM Score of A. The company has expected earnings growth of 15.2% for the current year. Its earnings estimate for the current year has improved by 10.2% over the last 30 days. The stock has returned 37.7% over the last one year, outperforming the Zacks Consumer Services - Miscellaneous industry, which has lost 27.1% over the same period.

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.

Summer Infant has a VGM Score of A. The company has expected earnings growth of 42.9% for the current year. The stock has returned 6.4% over the last one year, outperforming the Zacks Consumer Products - Discretionary industry, which has lost 0.7% over the same period.

Weight Watchers International, Inc. WTW is the largest provider of weight control programs in the world.

Weight Watchers International has a VGM Score of B. The company has expected earnings growth of 32% for the current year. The stock has returned 179.6% over the last one year, outperforming the Zacks Consumer Services - Miscellaneous industry, which has gained 27.1% over the same period.

Melco Resorts & Entertainment Limited MLCO is a developer, owner and operator of casino gaming and entertainment casino resort facilities primarily in Asia.

Melco Resorts & Entertainment has a VGM Score of B. The company has expected earnings growth of more than 93.2% for the current year. Its earnings estimate for the current year has improved by 5.8% over the last 30 days. The stock has returned 82.4% over the last one year, outperforming the Zacks Gaming industry, which has returned 51.8% over the same period.

Gray Television, Inc. GTN is a television broadcaster which is an owner and operator of both television stations and digital media channels.

Gray Television has a VGM Score of B. Its earnings estimate for the current year has improved by 4.6% over the last 30 days. The stock has returned 28.5% over the last one year, marginally underperforming the Zacks Broadcast Radio And Television industry, which has returned 30.4% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential

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