Retail Sales Surge in May: 3 Stocks to Buy

Retail sales seemed to have shed off the first quarter gloom after extending gains into the third successive month. The auto sector, which accounts for around 20% of retail sales, was one of the main catalysts behind the surge. Moreover, strong gains witnessed at gasoline stations, and building-materials and gardening stores segment also boosted retail sales in May.

The US Department of Commerce reported that retail sales increased 1.2% in May from the previous month to $444.9 billion, significantly higher than the April’s revised gain of 0.2%. Though it came in line with the consensus estimate, May’s figure increased 2.7% from the year-ago level. It was also reported that retail sales rose 2.1% year over year through March to May period.

Meanwhile, March’s gain was revised upward to 1.5%, marking the highest monthly gain in almost 5 years. Strong gains in retail sales indicated that the economy is recovering at an impressive rate after having a disappointing first quarter.

Sales Ride Gasoline, Auto Rally

Sales at gasoline stations rose 3.7% in May, in contrast with April’s loss of 0.6%. It was the biggest gainer among the segments, signaling a gradual recovery for the energy sector after the rampant slump in oil prices over the past one-year period.

Sales in the auto sector also played an important role in boosting sales in May. Sales at motor vehicle & parts dealers rose 2% from previous month, compare to 0.7% rise in April. It surged 8.2% from year-ago level. The auto industry witnessed its best May ever in terms of light vehicle sales. Strong demand for light trucks along with crossovers and SUVs boosted auto sales in May. Low level of oil prices and a low-rate environment helped the auto sector to register strong gains.

Separately, most of the housing data released in May were encouraging, which indicated that the housing market has rebounded strongly after getting affected by a severe winter in the first quarter. Apart from existing home sales, all the major metrics registered healthy gains in April. Sales at building-materials and gardening stores gained 2.1% in May, compared to a loss of 0.4% in April. Moreover, sales surged 6.2% year on year.

Catalysts Behind the Surge

After witnessing a slowdown in the first quarter, several indicators signaled that the economy is gradually gaining strength. According to the US Labor Department, the US economy created a total of 280,000 jobs in May, witnessing the largest job addition since December 2014. Though the unemployment rate marginally rose to 5.5% in May, the rate is expected to decline gradually to Fed’s target this year.

The average hourly wages also witnessed a strong year-on-year gain of 2.3%. These improvements signaled a strong recovery in labor market condition. Moreover, the housing market has recovered at an impressive rate over the second quarter, which also had a positive impact on the retail sales.

It is also speculated that Memorial Day weekend had also played an important role in boosting May’s retail sales. Low oil prices, improving labor market condition and low rate environment helped consumers to spend more in the retail sector. This sector accounts for one-third of consumer spending. It is anticipated that retail sales will continue to register strong gains for the rest of this year on the back of improving US economy.

3 Prominent Picks

Below we present 3 stocks from sectors that played key role in May’s retail sales. Each of these stocks has a favorable Zacks Rank. Also, with our style score system we have identified the key statistics to pay close attention to. The attractiveness of these companies as an investment option at this stage is confirmed by its Style Score of ‘A’ or ‘B.’ Hence, investors may consider these stocks to strengthen their portfolio.

Holly Energy Partners (HEP - Snapshot Report), through its subsidiaries, carries out operations related to petroleum product and crude pipelines, distribution terminals and storage tanks. This Zacks Rank #1 (Strong Buy) stock primarily operates in West Texas, New Mexico, Arizona and Utah.

HEP has a Growth Style Score of ‘B’ and a forward PE ratio of 21.96, as compared to industry PE of 31.6x. The company has a current year growth estimate of 17.5%. The Zacks Consensus Estimate for the current year EPS has been revised 4.1% upward over the last two months.

PACCAR Inc. (PCAR - Analyst Report) is a global technology leader in the design, manufacture and customer support of high-quality light-, medium- and heavy-duty trucks. This Zacks Rank #2 (Buy) stock also provides financial services and distributes truck parts related to its principal business.

PACCAR has a Growth Style Score of ‘B’ and a solid forward PE ratio of 14.41. The company has a current year growth estimate of 18.2%. The Zacks Consensus Estimate for the current year EPS has been revised 3.2% upward over the last two months.

PGT Inc. (PGTI - Snapshot Report) is the leading manufacturer and supplier of residential impact-resistant windows and doors in the US. PGT is also one of the largest window and door manufacturers in the United States.

This Zacks Rank #2 (Buy) stock has a Growth Style Score of ‘A.’ The company has a current year growth estimate of 46.5%. The Zacks Consensus Estimate for the current year EPS has been revised 6.8% upward over the last two months.

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

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