5 Stocks to Buy as Retail Sales Rebound in October

Retail sales staged a strong rebound in October following small declines over the last two months. Spending increased on building materials and motor vehicles, a result of rebuilding efforts, following the devastation wreaked by Hurricane Florence. Gas station sales also surged, indicating a jump in oil prices.

This effect will likely recede following the recent plunge in oil prices. But a robust labor market and fresh signs of wage growth will continue to support spending on categories that gained in October. This includes department stores and clothing outlets. This is why it makes good sense to invest in such retail stocks.

Consumer Spending Robust at Start of Q4

According to the Department of Commerce, retail sales increased 0.8% in the month of October, exceeding the consensus estimate of 0.5%. However, September’s initial increase of 0.1% was revised downward to reflect a decline of 0.1%. Excluding auto dealers and gas stations, retail sales increased 0.3%.

Year over year, retail sales increased 4.6%. Further, core retail sales, which exclude autos, gasoline, building materials and food services, increased 0.3%. This metric closely corresponds to the consumer spending component of GDP.

Overall, the report indicates that consumer spending was in good shape at the start of the fourth quarter. Despite concerns about trade deficit, this engine of expansion is likely to maintain strong growth for the economy going ahead.

A robust labor market, along with an unemployment rate of 3.7%, the lowest since December 1969 is supporting consumer spending. Record low unemployment has also caused wages to grow at their fastest pace since early 2009 in October.   

Autos, Gasoline, Building Materials Lead Gains

Strength in retail sales is a positive sign ahead of the crucial holiday shopping season. Sales at motor vehicle and parts dealers increased 1.1% last month. Also, building material store sales increased 1%. Both these increases were the fallout of the havoc caused by Hurricane Florence as residents replaced damaged vehicles and repaired homes.

Sales at gasoline stations jumped 3.5%, reflecting the strength in oil prices prevailing during October. The current slump in crude oil indicates that this trend will likely fade away as prices at the pump decline.

Department stores registered a 1.3% increase in sales, while sales at clothing and accessories stores increased 0.5%. Electronics and appliance stores reported a 0.7% rise in sales. Spending increased on hobbies, musical instruments, sporting goods and books by 0.5%.

However, sales at food services and drinking places declined 0.2%, the likely fallout of Hurricane Michael which slammed into the Florida panhandle in mid-October. Sales at furniture and home furnishing stores declined 0.7%, weighed down by the slowdown in housing, following the recent spike in interest rates.  

Our Choices

October’s increase in retail sales indicates that consumer spending retained sufficient steam at the beginning of the fourth quarter. This in turn is being supported by record low unemployment, which also fueled a spurt in wage growth last month.

These trends are also likely to continue supporting the economy in the near term. This is why it makes sense to invest in retail stocks, especially the categories which have gained substantially last month. 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 based on a good Zacks Rank and VGM Score.

Asbury Automotive Group, Inc. ABG is one of the largest automotive retailers in the United States.

Asbury Automotive carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The company has expected earnings growth of 27.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 5% over the last 30 days.

Conn's, Inc. CONN is a specialty retailer of consumer durable goods in the United States.

Conn's has a VGM Score of B. The company’s expected earnings growth for the current year is more than 100%. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kohl's Corporation KSS is a department store chain that operates specialty department stores and an e-commerce site in the United States.

Kohl's has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 30.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.3% over the last 30 days.

DICK'S Sporting Goods, Inc. DKS operates as a full-line sporting goods retailer.

DICK'S Sporting Goods carries a Zacks Rank #2 and has a VGM Score of A. The company has expected earnings growth of 4.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 60 days.

The Children's Place, Inc. PLCE is a pure-play children's specialty apparel retailer.

The Children's Place carries a Zacks Rank #2 and has a VGM Score of B. The company has expected earnings growth of 4% for the current year.

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