Better-than-expected earnings are a clear indication that the corporate sector is having a good time. The primary reason for overall gains is that the U.S. consumer is an emboldened one, willing to spend more and more. A new report from Macquarie Research suggests that most of the gains being made are in two specific areas, ecommerce and services.
At a point when the U.S. economy is poised for growth as reflected in higher GDP numbers, it makes perfect sense to invest in that part of the economy which makes the largest contribution. Adding stocks from services and ecommerce to your portfolio makes perfect sense at this point.
Labor Market, Cheap Gasoline Boost Purchasing Power
The labor market is in the pink of health as indicated by this month’s labor numbers. At a total of 287,000 jobs in June, reported data was significantly higher than the consensus estimate of 177,000. Additionally, the unemployment rate increased to 4.9%, primarily because of a jump on the labor force participation rate (read: ETFs to Buy After Strong Jobs Report).
But what has been making purchasing decisions easier are the lowest gasoline prices in some time. A report released earlier this month by JPMorgan (JPM) examined how lower gas prices impacted customer last year. One of its conclusions was that a fall in gas prices had led to an increase in expenditure on goods and services. Spends had gone up for the restaurants and retail categories in particular (read: Here's how 1 million US consumers responded to lower gas prices).
Retail Sales, Consumer Confidence Impressive
Data on retail sales and consumer confidence clearly reflected the strength of the consumer at this point. Sales at retail stores and restaurants advanced 0.6% in June from the prior month. Retail sales also increased 2.7% from the same period last year (read: June Retail Sales Rejoice: ETFs & Stocks to Bet On).
Consumer confidence is also high, given the latest University of Michigan consumer sentiment, which declined to 89.5 in July. Despite the fact it came in below estimates, consumer sentiment remains at appreciably high levels.
E-Commerce, Services Primary Gainers
Consumer spending contributes nearly 70% of U.S. GDP, which is why these signs are particularly encouraging. According to the report from Macquarie Research, most of the expenditure is attributable to ecommerce and services. Over the last two years nearly 100% of the increase in consumer expenditure took place on the ecommerce and services categories.
Meanwhile, the average prices of services have increased by 50% over the last 15 years, while prices of goods have gone up by only 8%. While outsourcing has reduced the prices of goods, services which can’t be easily outsourced have accounted for the price increases. Over the last year, prices of goods have declined by 1.8%. In contrast prices of services have gone up 2.2%.
Overall, the report indicates that the outlook for ecommerce and services remains bright. However, certain categories such as clothing, footwear and transport, requiring a higher level of industrial involvement should be avoided.
Picking stocks from the rest of the large services sector as well as ecommerce looks like a prudent option at this time. At the same time, it is important to pick winning stocks.
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.
Stamps.com Inc. STMP is a leading provider of Internet-based postage services.
Stamps.com has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 37.6% for the current year.
Five Star Quality Care Inc. FVE is in the business of leasing and operating senior living facilities, including senior apartments, assisted living facilities, congregate communities and nursing homes.
Five Star Quality Care has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 91.7% for the current year. Its earnings estimate for the current year has improved by 66.7% over the last 30 days.
Liberty TripAdvisor Holdings, Inc.’s LTRPA businesses consist of its subsidiaries,TripAdvisor and BuySeasons, through which it operates in the online travel information and ecommerce industries.
Liberty TripAdvisor has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year.
Carrols Restaurant Group, Inc. TAST is a franchisee of Burger King restaurants across 16 states in the U.S.
Carrols Restaurant has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 48.7% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 22.65, lower than the industry average of 22.89.
Diamond Resorts International, Inc. DRII is an operator of hospitality facilities and also offers vacation ownership options.
Diamond Resorts has a Zacks Rank #2 and a VGM Score of A. Its earnings estimate for the current year has improved by 0.2% over the last 30 days. It has a P/E (F1) of 14.73, which is lower than the industry average of 18.00.
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