Retail Sales Rebound in January: ETF & Stock Picks
After witnessing a moderation at the close of 2016, U.S. retail sales staged a solid comeback in the month of January. Sales in January grew 0.4% sequentially last month, after an upwardly revised 1% rise in December and came ahead of market expectations of a 0.1% expansion. On an annualized basis, retail sales grew 5.6% (read: Top ETF Stories of January 2017).
Increased sales at gas stations, restaurants and outlays toward electronics and appliances more than made up for a steep decline in auto sales. Motor vehicle purchases witnessed the largest decline (1.4%) in 10 months, after expanding 3.2% in December. Barring automobiles, gasoline, building materials and food services, retail sales increased 0.4% following an upwardly revised 0.4% increase in the final month of 2016.
In January, the final reading of the University of Michigan's consumer sentiment for the U.S. came in at 98.5. It was the highest reading since January 2004. A healing job market, moderately accelerating wage growth and Trump’s promises of fiscal stimulation can probably be credited to greater consumer confidence in September.
In January, sales at gas stations ticked up 2.3% following a 3.2% increase in the prior month and sales at sporting goods, hobby and book stores grew 1.8% compared with a 0.2% dip recorded last month. Restaurants saw 1.4% sales growth, rebounding from 1.1% decline.
Market Impact
The market reaction to January retail sales data was positive on sector ETFs. SPDR S&P Retail ETF XRT and VanEck Vectors Retail ETF RTH gained about 0.9% each on February 15 following the release of retail sales data, and PowerShares Dynamic Retail ETF PMR was up about 0.6%.
What’s Ahead?
Retail sales’ strong start to 2017 actually points to strong GDP growth in Q1. Even department stores that have been losing appeal to online stores lately, participated in the retail rally. Sales at department-stores increased 1.2% in January, representing “the biggest increase in more than a year.” Investors should note that spending at department stores declined 7.2% in December, representing the 23rd successive month of year-over-year drop.
That being said, it is still early to take a call on the retail sales trend for the rest of the year. This is especially true given the recent rebound in energy prices, which is likely to lead consumers to spend heavily on gas stations(read: Ten Predictions for the ETF Industry in 2017).
On the other hand, the Fed is likely to raise rates faster this year thanks to an improving economy. If the Fed hikes rates in the coming month, it should not be more than just 25 bps. This bit of policy tightening should be plausible for cyclical stocks like consumer discretionary and retail (read: Yellen Gives Hawkish Signals: 5 ETF Plays).
Against such a backdrop, below we recommend two ETFs to make the most of U.S. retail sales growth.
ETF Picks
PowerShares DWA Consumer Cyclicals Momentum Portfolio ETF PEZ
With improving economy and the prospect of rising inflation, cyclical sectors should do well. The fund puts about 34% weight in specialty retail followed by hotels and restaurants (16%) and Internet and direct marketing retail (13.5%). The fund added about 0.7% on February 15 (see all consumer discretionary ETFs here).
USCF Restaurant Leaders MENU
Due to American’s renewed interest in eating out, this restaurant ETF deserves a look. The fund looks to track the Restaurant Leaders INDXX Index and charges 65 bps per year for its exposure. Arcos Dorados Holdings Inc-A, Bojangles' Inc and The Cheesecake Factory Inc. are the top three holdings of the fund (read: .
Stock Picks
We also picked two retail stocks on the basis of a VGM (Value-Growth-Momentum) Style Score of ‘A’ and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold), at the time of writing. Our chosen stocks are:
Good Times Restaurants Inc. GTIM
Through its wholly owned subsidiary, the company is into the business of owning and franchising restaurants under the name Good Times Drive Thru Burgers.This Zacks Rank #1 stock with a VGM score of ‘A’ can be a good pick. The stock was up about 0.8% on February 15, 2017.
Aaron's Inc. AAN
With electronics & appliance stores seeing a 1.6% jump in sales following a 1.1% fall, thisZacks Rank #3 company, which is into the sales of specialty retailing of residential and office furniture, consumer electronics, home appliances and accessoriesis our chosen pick. It has a VGM score of ‘A.’ The stock added about 0.2% on February 15, 2017.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Aaron's, Inc. (AAN): Free Stock Analysis Report
VANECK-RETAIL (RTH): ETF Research Reports
SPDR-SP RET ETF (XRT): ETF Research Reports
Good Times Restaurants Inc. (GTIM): Free Stock Analysis Report
USCF-RSTRNT LDR (MENU): ETF Research Reports
PWRSH-DYN RETL (PMR): ETF Research Reports
PWRSH-DW CON CY (PEZ): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
