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5 Top Stocks to Buy on Solid Retail Sales

Swarup Gupta

U.S. retail sales increased in May while April’s figure was revised to reflect a gain instead of a decline reported earlier. Gains were broad-based, powered by a major spurt in auto sales. However, the increase remains considerable even when auto sales are excluded. Only a few categories, such as department stores and clothing registered declines last month.

The report comes as welcome news for American investors, who have been concerned about the state of the economy. It may also prompt economists to revise their estimates for second-quarter GDP higher. Better economic data could also delay a much-touted Fed rate hike. With the American consumer remaining confident, it makes good sense to invest in select retail stocks.

Sales Surge, Revision Leads to Gains in April

In May, retail sales increased 0.5% as U.S. consumers purchased more motor vehicles and a slew of other goods. Also, April’s numbers were revised to reflect an increase of 0.3% instead of a 0.2% decline reported earlier. Though May’s increase came in below the estimated level of 0.7%, changes to April data meant that this was the second straight month for gains in retail sales.

Retail sales have also increased 3.2% over the past year. Auto sales registered a strong rebound last month, gaining 0.7% after registering a decline of 0.5% in April. Sales at service stations increased 0.3%. However, sales have increased 0.5% even after excluding the impact of motor vehicles and parts.

Electronics, Sporting Goods, Nonstore Retailers Lead Gains

In May, sales at electronics and appliance stores increased by 1.1%. Receipts at sporting goods, hobby, musical instrument and book stores also gained 1.1%. However, leading the pack was the nonstore category with an increase of 1.4%, the strongest since January.

Significant gains were also experienced in the health and personal care category, receipts for which increased 0.6%. Sales at food services and drinking places advanced 0.7%.

Interestingly enough, sales at clothing outlets remained flat over the month, while building store sales edged up 0.1%. The only three categories to experience a decline in May sales were miscellaneous store retailers, food and beverage stores, and department stores.

GDP Estimates Likely to Rise, Rate Cut May be Delayed

May’s retail sales data puts to rest recent questions about the state of the U.S. economy. This metric has also been volatile this year, but back-to-back gains allay any concern on that count. Economists are hoping consumers will maintain spending at the current levels in order to extend the economic expansion.

Consequent gains for retail sales could also prompt analysts to raise their estimates for second-quarter GDP.  Currently, most projections for the period are below 2%. Since the report also indicates that the economy is still robust, it could delay a highly awaited Fed rate cut. A rate cut in July now looks unlikely.

Our Choices

May’s strong retail sales numbers have successfully dispelled recent fears about the U.S. economy. Robust consumer spending is now likely to extend the current economic expansion even further. The retail sector will gain significantly from such trends.

Investing in retail stocks looks like a smart option at this point. 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 good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lithia Motors, Inc. LAD is one of the leading automotive retailers of new and used vehicles, and related services in the United States.

Lithia Motors has a VGM Score of A. The company’s projected growth rate for the current year is 11.7%. The Zacks Consensus Estimate for the current year has improved by 8.6% over the past 60 days.   

Hibbett Sports, Inc. HIBB is a major athletic-inspired retailer, located in small and mid-sized markets across the country.

Hibbett Sports has a VGM Score of A. The company’s projected growth rate for the current year is 18.1%. The Zacks Consensus Estimate for the current year has improved by 9.2% over the past 30 days.   

BMC Stock Holdings, Inc. BMCH provides diversified building products and services to professional builders and contractors primarily in the residential housing market.

BMC Stock Holdings has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 11.5% over the past 60 days.  

Group 1 Automotive GPI is one of the leading automotive retailers in the world.

Group 1 Automotive has a VGM Score of B. The company’s projected growth rate for the current year is 12.5%.

Noodles & Company NDLS is a developer and operator of fast-casual restaurants in the United States.

Noodles & Company has a VGM Score of B. The company’s projected growth rate for the current year is more than 100%.  

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