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Consumer Confidence Falls: 3 Stocks to Dump Now - Analyst Blog


It appears that the hiring and business conditions in April failed to hold consumer confidence – as reflected by a dip in Consumer Confidence Index (NYSE: CCI) for the month. The Index's reading slowed to 82.3, after reaching the highest level of 83.9 (in March) since Jan 2008. However, the short-term outlook for the economy remained steady as the Expectations Index was almost unchanged at 84.9 compared to 84.8 in March.

As per the Conference Board, consumers were worried about the sluggish labor market, which pulled down the Present Situation Index to 78.3 from 82.5 last month. Respondents who perceived “plentiful” jobs fell to 12.9% from 13.8% whereas those who considered jobs as “hard to get” rose to 32.5% from 31.4%.

Volatile stock markets, rising crude prices and slowing housing market growth are primarily responsible for this subdued consumer confidence. The S&P 500 fell over 2.7% in January, grew 6.7% in February and 1.4% in March and remained almost flat in April.

Further, frigid weather and geopolitical tensions escalated oil prices to new highs. For the January–March period, crude oil swung between lows of $91.25 per barrel to highs of $105.22 per barrel, staying above the $100 per barrel mark for quite some time. Housing growth slowed in February as per the Standard & Poor's/Case-Shiller 20-city home price index survey. The reading came in at 12.9% in February, down from a 13.2% gain in January.

To add to the concerns, the current job data turned out to be conflicting. The report stated better-than-expected addition of 288,000 jobs in April and unemployment rate falling below the threshold limit to 6.3%. However, as per sources, the apparently good report was due to a lesser number of people looking for jobs. People not looking for jobs are not considered unemployed.  

Falling consumer confidence is not good as consumer spending constitutes over two-thirds of the U.S. economic activity.

We believe this not-so-upbeat consumer sentiment will directly hit the Retail sector. Therefore, it might be a good idea to dump some retail stocks that are likely to underperform in the near-term.

Similar to wise buying decisions, exiting potential underperformers at the right time helps maximize portfolio returns.

Here we have handpicked 3 such Retail/Wholesale stocks that look expensive, hold an unfavorable Zacks Rank and have been recently witnessing downward estimate revisions:

Family Dollar Stores Inc. (NYSE: FDO): This department retailer carries a Zacks Rank #5 (Strong Sell) and has witnessed a massive downward revision in the last 30 days following the dismal second-quarter fiscal 2014 performance. The Zacks Consensus Estimate has gone down 7.6% for fiscal 2014.

Moreover, the valuation looks expensive as the stock is trading at an 11.2% premium to the peer group average in terms of forward P/E ratio. Further, long-term EPS growth rate of 9.1% is significantly lower than the peer group average of 12.3%.

Another such stock that you may consider dropping is electronics retailer hhgregg (NYSE: HGG), which has witnessed a significant price decline after posting a weak third quarter fiscal 2014 performance on Jan 30, 2014. Subsequently, the Zacks Consensus Estimate has gone down over 73% for fiscal 2014.

A Zacks Rank #4 (Sell) further confirms weakness in the stock. The stocks trades at a substantial premium to the peer group average in terms forward P/E ratio. Also, it has a long-term EPS growth rate of 3.1%, which is significantly lower than the peer group average of 14.8%.

And lastly, Noodles & Company (NASDAQ: NDLS), which operates in the fast-casual restaurant sector, has seen a 4% decline in the Zacks Consensus Estimate for 2014 over the last 30 days, after reporting in line first-quarter 2014 results. Moreover, this Zacks Rank #4 (Sell) stock has a expensive valuation as it trades at a forward P/E ratio of 69.7 compared with peer group average of 22.6.

Bottom Line

The fluctuation in economic data and consumer confidence may not turn out too badly for the retail stocks, but these 3 stocks have high chances of losing in the near term as their fundamentals look weak.

So, if you are holding any of these stocks, don't wait much to offload them.

FAMILY DOLLAR (NYSE: FDO): Free Stock Analysis Report
HHGREGG INC (NYSE: HGG): Free Stock Analysis Report
NOODLES & CO (NASDAQ: NDLS): Free Stock Analysis Report
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The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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