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Give These 4 Retail Stocks A Miss As Earnings Season Arrives

Zacks

Dark clouds loom over markets even as Wall Street is gearing up to witness an impressive earnings season. The concerns are pretty valid given Trump’s threat to impose another 10% tariff on $200 billion Chinese goods following action on $34 billion worth of imports last week.

The trade hostility between the United States and China has been influencing the market for quite some time now. However, its high time that you bury the trade related fears and rejig your portfolio. Per the latest Earnings Outlook, total earnings for the S&P 500 index is expected to rise 19.1% in second-quarter 2018, with 11 of the 16 Zacks sectors likely to register double-digit earnings growth. Total revenues are projected to improve 8.2%.

Retail-Wholesale, which typically performs well in a maturing economic cycle, is among the sectors that are likely to steal the show this season. Markedly, the sector is anticipated to witness bottom-line growth of 18.4%, while top-line is anticipated to increase 7.9%. The underlying economic strength backed by robust job market, latest tax reform and pro-business policies are likely to act as catalysts for the sector.

So, picking stocks that are likely to trump estimates can fetch handsome returns for investors. This is because a stock generally picks up steam on an earnings beat. On the flip side, not all retail companies are going to beat or meet expectations. There will be some slow coaches. Apparently, dodging stocks with lower earnings beat predictability will definitely minimize the risks to your portfolio.

We can identify the probable underperformers before they report by combining our proprietary Zack Rank and Earnings ESP system. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. Our research shows that stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) along with a negative Earnings ESP have a very slim chance of outperforming estimates.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

4 Out-of-Favor Stocks

Papa John's International, Inc. PZZA, which has a Zacks Rank #5 and an Earnings ESP of -5.77%, does not deserve to be in your list. The Zacks Consensus Estimate for the quarter is pegged at 52 cents and has witnessed a downward revision of 3 cents in the last 30 days. The company recorded an average negative earnings surprise of 4.7% in the trailing four quarters. The company, which operates and franchises pizza delivery and carryout restaurants, is expected to report second-quarter 2018 results on Aug 7.

We also expect you to keep distance from Yum China Holdings Inc. YUMC, which has a Zacks Rank #5 and an Earnings ESP of -3.03%. The restaurant operator is slated to report second-quarter 2018 numbers on Aug 1. The Zacks Consensus Estimate for the quarter is pegged at 33 cents, declining by a couple of cents in the past 30 days.

We also advise you to stay away from Big Lots, Inc. BIG, a broad-line closeout retailer. The stock has a Zacks Rank #5 and an Earnings ESP of -0.86%. The Zacks Consensus Estimate for the quarter is pegged at 67 cents, tumbling 9 cents in the past 60 days. The company posted negative earnings surprise of 20.2% in the last reported quarter. It is expected to report second-quarter fiscal 2018 results on Aug 24.

Vitamin Shoppe, Inc. VSI is another stock to shun. This omni-channel specialty retailer and contract manufacturer of nutritional products has a Zacks Rank #4 and an Earnings ESP of -55.56%. The Zacks Consensus Estimate of loss for the quarter is pegged at 5 cents, falling from an earnings estimate of 1 cent in the past 30 days. The company has missed the consensus mark by an average of 33.7% in the trailing four quarters. The company is expected to come up with second-quarter 2018 results on Aug 8.

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