Wall Street is having a dream run since Mar 23, when all the three major indexes — the Dow , the S&P 500 and the Nasdaq Composite — fell to the lowest level after entering the coronavirus-induced bear market on Mar 11. An unprecedented stimulus package from the U.S. government and the Fed, reopening of the domestic economy after more than a month of lockdown and stabilization of economic data clearly indicate that the market’s worst is over.

Investment in risky assets like equities strengthened as market participants’ sentiment got a boost. Meanwhile, the consumer discretionary sector has become a major driver of Wall Street rally in the past month.

Three Positive Catalysts

Wall Street rally is likely to gather momentum in the near term due to three major factors.

First, an unprecedented $8 trillion stimulus injected by the U.S. government and the Fed will create significant pent-up demand. Moreover, the central bank’s decision to keep the benchmark interest rate at 0% and inject money into the economy by means of purchasing even the high-yielding junk bonds would create a strong credit market.

Second, all 50 states eased lockdown restrictions and opened up their economies in some form last month. As the economy reopens in a phased manner and businesses gain pace, more people will be reemployed and consequently, consumer spending, the major driver of the U.S. GDP, will increase.

Third, the U.S. economy is bottoming out. This is evident from the recently released economic data. Initial jobless claims, though high till the last-reported week, has been declining systematically over the past nine weeks.

Moreover, better-than-expected consumer confidence and ISM manufacturing data in May, surging home builders’ sentiment, growing mortgage applications to purchase homes last month, and narrower-than-expected fall in orders of durable goods in April are clearly showing that the U.S. economy is coming out of the clutches of the deadly coronavirus.

Importance of Surging Consumer Discretionary Stocks

The consumer discretionary sector comprises businesses that sell goods and services, which are considered non-essential by consumers. These are the products that consumers can avoid without any major consequences to their well-being. In fact, these goods are desirable only if the available income of an individual is sufficient to purchase them. This is in sharp contrast to consumer staples products that are absolutely necessary.

Notably, the U.S. economy was performing well buoyed by strong consumer spending before the advent of coronavirus. However, the lockdowns imposed by the United Sates and across the world along with the breakdown of the global supply chain system, significantly dented both consumer and business confidence.

However, the above-mentioned positive developments will generate higher aggregate demand for the economy, especially for consumer discretionary stocks. This is evident from the fact that the Consumer Discretionary Select Sector SPDR (XLY), one of the 11 broad sectors of the S&P 500 Index, gained 12.7% in the past month, second only to the Energy Select Sector SPDR (XLE), which gained 13.1%. The benchmark itself grew only 8.8%.

Our Top Picks

We have narrowed down our search to five consumer discretionary stocks that have skyrocketed more than 25% in the past month with strong growth potential and robust earnings estimate revisions. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past month.

BJ’s Wholesale Club Holdings Inc. (BJ – Free Report) is an operator of membership warehouse clubs primarily in East United States. It operates clubs and BJ’s Gas locations in several states. The Zacks Rank #1 company has an expected earnings growth rate of 51.4% for the current year (ending January 2021). The Zacks Consensus Estimate for current-year earnings has improved 2.8% over the last 7 days. The stock price has climbed 36.3% in the past month.

Perdoceo Education Corp. (PRDO – Free Report) operates colleges, institutions, and universities through online, campus based and blended learning programs in the United States. It operates through three segments: Colorado Technical University, American InterContinental University and All Other Campuses. The Zacks Rank #1 company has an expected earnings growth rate of 10.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.1% over the last 30 days. The stock price has rallied 30% in the past month.

DouYu International Holdings Ltd. (DOYU – Free Report) provides a game-centric live streaming platform primarily in China. It operates its platform on both PC and mobile apps. The Zacks Rank #1 company has an expected earnings growth rate of 200% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 34.2% over the last 7 days. The stock price has surged 27.4% in the past month.

Camping World Holdings Inc. (CWH – Free Report) operates as an outdoor and camping retailer. It operates through three segments: Consumer Services and Plans, Dealership and Retail. The Zacks Rank #2 company has an expected earnings growth rate of 193.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 131% over the last 30 days. The stock price has soared 169% in the past month.

Peloton Interactive Inc. (PTON – Free Report) provides interactive fitness products in North America. It offers connected fitness products, such as the Peloton Bike and the Peloton Tread, which include touchscreen that streams live and on-demand classes. The Zacks Rank #2 company has an expected earnings growth rate of 31.6% for next year (ending June 2021). The Zacks Consensus Estimate for next-year earnings has improved 2.6% over the last 7 days. The stock price has jumped 44.6% in the past month.

Author: Nalak Das

Source: Zacks: 5 Top Consumer Discretionary Stocks to Gain From Market Rally

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