3 Retail Gems Amid Consumer Confidence Aberration

Amid reports of rising consumer spending in most districts, consumer confidence index in the U.S. (as measured by the Thomson Reuters/University of Michigan) dropped in August from a six-year high in July. The index reportedly declined to 80 in August from 85.1 in the prior month. The decline was probably due to intense speculations about the Fed tapering its $85 billion monthly bond-buying program.

Meanwhile, The Conference Board Consumer Confidence Index rose from a revised reading of 81 in July to 81.5 in August. The rise was primarily attributable to job additions and falling unemployment. However, the August tally fell short of the June reading of 82.1, which was the highest figure recoded since January 2008.

As we try to understand the reason for this aberration, September promises to be an eventful month. The events lined up this month including a possible military action against Syria, the G20 summit, changing dynamics of emerging markets, the Fed’s meeting to decide on tapering of the US stimulus, and the German election are likely to guide the market’s direction.

Meanwhile, the U.S. stock market is yet to run out of steam and boasts a handful of priceless stocks. Before we have some cherry-pickings amid the rubble, let us rehash the various turn of events.

A Resilient U.S. Economy

Enduring recessionary forces, the U.S. economy has showed resilience with 200,000 new jobs per month added on an average in the last six months. As a result, unemployment declined to 7.4% in Jul 2013 from 7.8% in Sep 2012 when the Fed had started its stimulus program. The latest figures from the Labor Department suggest that jobless claims in the week ended Aug. 24 declined 6,000 to 331,000.

Fed Chairman Ben Bernanke had earlier hinted that an unemployment rate of about 7.0% could serve as a benchmark for ending the third round of quantitative easing, or QE3. The program comprised a monthly buying of $45 billion worth of Treasury notes and another $40 billion in mortgage-backed securities. With Fed’s balance sheet increasing to a record $3.65 trillion, Bernanke has one more valid reason to contemplate tapering.

The Fallouts

However, with increased market speculations about tapering, mortgage rates have skyrocketed, threatening to derail the healthy momentum in the housing market. The housing sector has been one of the catalysts for the economic growth.

Freddie Mac data reveals that rate on a 30-year fixed mortgage loan has increased to 4.51% as of Aug 29, from a Nov 2012 low of 3.31%. Higher mortgage rates coupled with increasing home prices are increasingly making it difficult to refinance and buy a new home, thereby somewhat affecting the housing recovery in the U.S.

On the flip side, new job additions and falling unemployment rate have strengthened the argument in favor of a modest to moderate economic recovery. Inflation, as measured by the personal-consumption-expenditures price index, has also remained healthy at 1.3%. Moving forward, Fed intends to maintain minimal interest rates until the unemployment rate falls at least to 6.5% and inflation remains below 2.5%.

3 Stocks to Buy Now

Despite the ‘Fed taper mayhem,’ there are certain stocks with attractive valuation metrics backed by a solid Zacks Rank. These primarily include the following Zacks Rank #1 (Strong Buy) retailers.

Fortune Brands Home & Security, Inc. (FBHS): Based in Deerfield, IL, the company offers a diverse portfolio of home and security products for residential home repair, remodeling, new construction, and security and storage applications. Since its inception in 1988, the company has emerged as a market leader in all of its operating segments. FBHS has a forward P/E and long-term earnings expectation of 26.10x and 26.00%, respectively.

Kirkland's Inc. (KIRK): The company trades at a forward P/E of 21.37x and has a long-term earnings expectation of 12.50%. Based in Nashville, TN, Kirkland’s operates as a specialty retailer of home décor and gift items offering an assorted collection of framed art, mirrors, wall décor, candles, lamps, decorative accessories, accent furniture, textiles, garden-related accessories and artificial floral products.

hhgregg, Inc. (HGG): Headquartered in Indianapolis, IN, the company has a forward P/E and long-term earnings expectation of 19.00x and 13.75%. Operating as a specialty retailer, hhgregg offers a diverse collection of home appliances, televisions, computers, consumer electronics, home entertainment furniture, mattresses, fitness equipment and related services.

While the volatility is expected to continue until at least the Fed clearly spells out its tapering timeline, this is perhaps the most opportune time to own such high-potential stocks with strong fundamentals that pledge a healthy ROI.

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