3 Retail Stocks to Continue Their Winning Streak in 2015

Look for these stocks to outperform the market as we head into the coming earnings season.

This article originally appeared at Zacks.com. Reprinted with permission.

The US economy is ready in 2015 after an eventful journey last year that started with a severe winter locking consumers indoors and a loss of steam in the market. Then the economy started to rebound and the Federal Reserve hinted at a recovery by winding up its stimulus program which was initiated to boost economic growth and keep interest rates low.

The economy now looks to have enough steam to carry the momentum, in spite of a slowdown in China, turmoil in Russia, sluggishness in Japan, and a struggling Europe. The confidence in an uphill ride amid a shaky international front came mostly from the third and final data for real gross domestic product (GDP) that unveiled the fastest rate of economic growth since the third quarter of 2003, giving the market sufficient impetus.

The economy registered growth of 5% during the third quarter of 2014, according to the “advance estimate” by the Bureau of Economic Analysis. The rate fared better than the second and first projections of 3.9% and 3.5% increases, respectively. Higher business investment and export along with improved consumer spending laid the foundation for a strong GDP.

Gradual recovery in the housing market, a strengthening manufacturing sector, an improving labor market, and falling gasoline prices also favored the economy, and boosted consumers’ disposable income. Consequently, the economy returned to the growth trajectory in the second quarter, when it increased 4.6%, after falling 2.1% in the first quarter due to inclement weather. Market experts believe that improvement in global economy hinges upon the U.S., which is expected to grow at a pace of over 3% in 2015.

Low oil prices and rising wages are good for U.S. consumers. And with consumer confidence—a key determinant of financial health—reaching its recent heights, the future looks bright for the economy. The data released by the University of Michigan and Thomson Reuters showed that the consumer sentiment index buoyed up to 93.6 in December from the November reading of 88.8, and was at its highest since Jan 2007. According to the recent Conference Board data, the Consumer Confidence Index increased to 92.6 in December from 91.0 in November.

321,000 jobs were created in November, and the unemployment rate is lingering around 5.8%, its lowest level in 6 years, according to the Bureau of Labor Statistics. The impressive jobs report confirms that the U.S. economy’s fundamentals are strong enough to sustain the momentum. And we expect this positive sentiment to encourage consumer spending, which accounts for over two-thirds of the U.S. economic activity. The Commerce Department revealed that consumer spending increased 3.2% in the third quarter from the initial estimate of 2.2%.

With bullishness widespread, the Federal Reserve is now contemplating raising interest rates. Analysts, however, still believe that the Fed will not be in any rush to increase the near-zero rates for fear of hitting the brakes on the pace of economic recovery. Industry analysts see the encouraging economic data finding reflection in interest rates sometime in mid-2015 but keep their fingers crossed over the market reaction to the move. Last year, the Dow Jones Industrial Average gained 8.4% and the S&P 500 advanced 12.4%.

With the economy in high gear, we could witness more upbeat numbers in the quarter to be reported. This definitely is the time to enrich your portfolio with a favorably ranked stock powered by the optimism of an earnings beat. This increases your chance of getting higher returns.

Profitable Mix: Favorable Zacks Rank + Positive Earnings ESP

A favorable rank indicates positive estimate revisions by analysts who are optimistic on the future performance of companies. Moreover, Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

For investors seeking to apply this strategy to their portfolio, we have highlighted 3 Retail/Wholesale stocks that may stand out this earnings season. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

As we head into 2015, it may be a good time to look at the investment landscape and add market outperformers.

Prominent Picks

O'Reilly Automotive Inc. (ORLY - Analyst Report) is a Zacks Rank #1 (Strong Buy) stock with an Earnings ESP of +1.80%. The current Zacks Consensus Estimate for fourth-quarter 2014 is $1.67 per share, portraying 19.1% growth from the prior-year period. This Springfield, MO-based retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the U.S., registered an average positive earnings surprise of 4.2% over the trailing four quarters, and has a long-term earnings growth rate of 15.9%. The stock surged roughly 50% in 2014 and is slated to report on Feb 4, 2015.

CVS Health Corp. (CVS - Analyst Report) is a Zacks Rank #2 (Buy) stock having an Earnings ESP of +0.83%. The current Zacks Consensus Estimate for fourth-quarter 2014 is $1.21 per share, which indicates an increase of 7.6% year over year. This Woonsocket, RI-based provider of integrated pharmacy health care services in the U.S. registered an average positive earnings surprise of 0.4% over the trailing four quarters, and has a long-term earnings growth rate of 13.8%. The company‘s shares soared 38.8% last year. CVS Health is expected to report on Feb 10.

ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA - Snapshot Report) is a Zacks Rank #2 stock having an Earnings ESP of +1.60%. The current Zacks Consensus Estimate for the fourth quarter of fiscal 2014 is $1.25 per share, which indicates an increase of 15.1% year over year. This Bolingbrook, IL-based specialty retailer of beauty products in cosmetics, fragrance, haircare and skincare registered an average positive earnings surprise of 7.6% over the trailing four quarters, and has a long-term earnings growth rate of 19%. The company’s earnings are expected to be released on Mar 12. The stock soared 33.3% last year.

Bottom Line

Who doesn’t want a portfolio of stocks that have the potential to outperform and beat earnings estimate? You can use Zacks Stock Screener to find other stocks with this winning combination.

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