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Avoid Rent-A-Center, Buy These Consumer Discretionary Stocks


In our school days, we learned “a stitch in time saves nine,” which implies that timely action is likely to prevent serious loss later on. How about applying the same principle to your portfolio? Dumping an underperforming stock at the right time helps maximize your portfolio’s return. So, as an investor it would be a rational decision to shun a stock that has been witnessing falling share price and estimates from your portfolio, before it hurts your return.

Here is one such consumer discretionary stock, Rent-A-Center, Inc. RCII, which is in troubled waters at the moment. The Zacks Rank #5 (Strong Sell) company’s shares tanked nearly 29% on Oct 11 after it issued dismal preliminary guidance for third-quarter 2016.

Preliminary Data a Jolt Ahead of Earnings

Rent-A-Center, which is slated to report its third-quarter 2016 results on Oct 26, expects Core U.S. same store sales to be down nearly 12% in the quarter, while Acceptance Now same store sales is estimated to be flat. Core U.S. gross profit is likely to be flat year over year. Rent-A-Center anticipates earnings per share both on the GAAP and non-GAAP basis to be in the range of 5 cents to 15 cents per share, well below the Zacks Consensus Estimate of 40 cents, which is likely to witness a downward revision in the coming days.

Management stated that the technical snags and outages after the execution of new point-of-sale system negatively impacted Core sales. The company further said: “While we expect it to take several quarters to fully recover from the impact to the Core portfolio, system performance has improved dramatically and we have started to see early indicators of collections improvement.”

Waning Top-line Performance

Rent-A-Center has been disappointing investors with its top-line performance for the past four consecutive quarters. Accelerated point of sale system rollout, sluggishness across the computers and tablets categories, headwinds across the oil-impacted markets and continued smartphones recast impacted the results.

Well from the above discussion it is quite apparent that it would be prudent to keep this stock off your portfolio at least for the time being.

Where to Invest Now?

Obviously, nothing about Rent-A-Center inspires confidence in the stock at the moment. Nevertheless, the consumer discretionary market still has a few promising stocks to offer. Given a rebounding U.S. economy, the sector is bubbling with optimism. A gradual recovery in the housing market and manufacturing sector, along with an improving labor market and lower gasoline prices, are favoring the economy and are acting as catalysts in raising buyers’ confidence. We anticipate this positive sentiment to translate into higher consumer spending.

Based on growth, valuation, fundamentals and the top Zacks Rank, we have picked three stocks that have potential.

3 Prominent Picks

We suggest investing in Francesca's Holdings Corporation FRAN, which operates as a chain of retail boutiques. The company has delivered an average positive earnings beat of 15.4% over the trailing four quarters and has a long-term earnings growth rate of 13.8%. The Zacks Consensus Estimate too has been on the rise over the last 90 days and has a VGM Score of “B.”

The stock has surged more than 35% in the past three months and has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Deckers Outdoor Corp. DECK, a leading designer, producer and brand manager of innovative, niche footwear and accessories developed for outdoor sports, and other lifestyle-related activities is another solid bet. The stock carries a Zacks Rank #2 (Buy) and has surged more than 29% year to date. The company has delivered positive earnings surprises in the trailing four quarters, and has a long-term earnings growth rate of 10.8%. Further, the Zacks Consensus Estimate has been showing an uptrend over the past 90 days and also has a VGM Score of “A.”

Another Zacks Rank #2 stock that investors may consider is Michael Kors Holdings Limited KORS. This global luxury lifestyle company’s shares have risen nearly 17% so far this year. It also has a VGM Score of “A.” An average positive earnings surprise of 10.9% over the trailing four quarters and a long-term earnings growth rate of 10.3% make the company quite an attractive investment option.

Bottom Line

Investors can confidently end their search at stocks with a better Zacks Rank status of either #1 or #2, which encompasses its strong fundamentals, promises favorable price movement and highlights analysts’ constructive view on the same via positive estimate revisions. A sturdy portfolio always promises higher returns.

Where Do Zacks' Investment Ideas Come From?

You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 ""Strong Buy"" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 ""Strong Sells"" and other private research. See the stocks free >>

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