Americans are increasingly comfortable about their well-being as the nine-year economic expansion continues to go strong for a solid performance in the second half of 2018. Current credit spreads are also at historic lows, which paint a rosier economic picture.
Since Americans gained optimism on the economy, things have been looking up for consumer stocks. Stocks of consumer discretionary companies are well poised to grow on signs of renewed consumer spending strength.
Consumer Comfort Rises to 17-Year High
The Bloomberg Consumer Comfort Index showed on Sep 20, that U.S. consumer sentiment went up last week to a new 17-year high on brighter views of the economy. While the weekly comfort index rose to 60.2, the highest since January 2001, a gauge tracking views about the economy also hit a 17-year high. A measure of buying climate, in the meanwhile, jumped to 52.5, the highest since September 2000. In addition, the survey’s monthly economic expectations index increased to 57.5 this month, the highest since March 2002.
Bloomberg’s survey remained consistent with the latest University of Michigan’s consumer sentiment report. The preliminary report showed that the consumer sentiment index came in at 100.8, the second-highest level since 2004. Americans, in fact, haven’t been this confident about their well-being in 18 years. Per the Conference Board, the consumer confidence index had climbed to 133.4 in August from a revised 127.9 in July. Thus, the key economic indicator that measures attitudes on future economic prospects reached the highest level since October 2000 and surpassed the post-recession high of 130 scaled this February.
Leading Indicators Signal Economy’s in Fine Fettle
Most of the components of the Conference Board’s Leading Economic Index indicated a 3% or more growth rate in GDP in the final two quarters of the year and is on track to hit the Trump administration’s annual growth target of 3%. If that happens, it would be the best yearly performance since 2005, two years before the Great Recession.
This gauge of 10 indicators meant to point out peaks and valleys in the business cycle had gone up 0.4% in August following even stronger gains in the prior two months. Ataman Ozyildirim, economist at the board, said that “the leading indicators are consistent with a solid growth scenario in the second half of 2018 and at this stage of a maturing business cycle in the U.S., it doesn’t get much better than this.”
The booming economy has already expanded at a seasonally adjusted rate of 4.2% in the April-June quarter, per the Commerce Department. This was slightly higher than the initial 4.1% read and also the strongest since a 4.3% annual gain recorded in the third quarter of 2014.
Gross domestic income (GDI), an alternative measure of economic growth, also increased at a 1.8% annualized rate in the second quarter. Thus, the average of GDP and GDI, also known as the gross domestic output and considered to be a better measure of economic activity, expanded at an encouraging rate of 3% in the April-June quarter.
Recession Indicator Shows Economy Has More Room to Run
Market pundits have mentioned that credit spreads for corporate bonds can serve as a reliable economic signal. A credit spread, by the way, measures the difference, or spread, in yields between corporate bonds and their risk-free U.S. Treasury bond. A widening spread signals at recession, while a narrowing spread shows that investors are upbeat about the economic outlook.
The following diagram does show that in some of the past recessions, the credit spread had indeed widened, while the current muted credit spreads implies bullish economic growth.
Why Does Consumer Sentiment Matter?
Such a record consumer sentiment number is a significant reading since it has been, historically, good at predicting consumer spending for the next three to six months. The more the confidence households generate, the more will they spend. Notably, consumer spending accounts for roughly 70% of the U.S. economy, which isn’t nominal.
These numbers influence companies’ production schedule. In fact, the consumer discretionary sector is mostly affected as spending plays a major role in determining revenues. This sector, which includes high-flying names like Netflix, Inc. NFLX and Amazon.com, Inc. AMZN, has not only doubled the S&P 500’s return but is also leading all sectors so far this year.
(Source: FactSet)
5 Top Winners
Since the aforementioned sector is positioned to benefit from this stellar reading on sentiment level, picking stocks from the same will be a smart move.
We have, thus, selected five consumer discretionary stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). Such stocks also boast of a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
American Woodmark Corporation AMWD manufactures and distributes kitchen, bath, and home organization products for the remodeling and new home construction markets in the United States. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings has increased 1.1% in the last 60 days. The company’s projected growth rate for the current year is 45.4%, while the Furniture industry is projected to rise 9.2%.
Callaway Golf Company ELY designs, manufactures, and sells golf clubs, golf balls, golf bags, and other golf-related accessories in the United States and internationally. The company has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has surged 23.5% in the last 60 days. The company’s projected growth rate for the current year is 88.7%, while the Furniture industry is expected to rise 30.4%.
Guess', Inc. GES designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has advanced almost 3% in the last 60 days. The company’s projected growth rate for the current year is 48.6%, while the Textile - Apparel industry is expected to rise 17.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Summer Infant, Inc. SUMR designs, markets, and distributes branded juvenile health, safety, and wellness products primarily in North America. The company has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has advanced 50% in the last 60 days. The company’s projected growth rate for the current year is 114.3%, while the Consumer Products - Discretionary industry is likely to grow 6.8%.
WideOpenWest, Inc. WOW operates as a cable operator in the United States. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has jumped 100% in the last 60 days. The company’s projected growth rate for the current year is 44.9%, while the Cable Television industry is projected to rise 16.9%.
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