Consumer confidence registered its second consecutive monthly gain in August, indicating that a strong basis for higher expenditure prevails. The Conference Board’s index increased to its second-highest level in 17 years. Consumers’ assessment of current conditions also surged to a record level.

Economists have attributed consumers' new-found confidence to strong labor and equity markets. Steady increase in housing prices is also indicative of an increase in purchasing power. Economists believe that the report suggests that consumption expenditure will continue to increase in the third quarter, which makes this a good time to pick consumer discretionary stocks.  

Index at Second-Highest Level Since 2000

Consumer confidence increased from the downwardly revised level of 120 in July to 122.9 in August. According to the initial estimate, consumer confidence had increased from 117.3 to 121.1 in July. This marks the second consecutive monthly increase for the index. It is also the second-highest level observed since the second half of 2000. Only in March did consumer confidence register a higher reading, of 125.6, than July. 

Additionally, the Present Situation Index increased from 145.4 to 151.2, the highest level experienced since July 2001. However, the future expectations index increased only slightly, from 103 to 104. But more significant was respondents’ assessment of the labor market situation. The percentage of those who believe that jobs are “plentiful” increased from 33.2% to 35.4%. Also, the percentage of those who think positions are hard to secure contracted from 18.7% to 17.3%, the lowest point witnessed since August 2001. 

Economy’s Strength Boosting Confidence

Most economists believe that a combination of housing price increases, labor market gains and burgeoning equity markets is driving consumer confidence higher. In June, the S&P/Case Shiller 20 city index increased to 5.7%, lifted by strong housing demand. Experts also believe that after the end of the “Trump Bump”, consumers were being buoyed by the economy’s inherent strength.

Fundamentals have become particularly relevant since policy expectations have largely petered out. Barclays PLC’s (BCS - Free Report) chief U.S. economist has also noted that the report reflects continuing strength in consumer confidence and indicates that expenditure could rise in the third quarter. It is quite likely that higher consumer spending would continue to be the economy’s primary engine of growth in the forthcoming quarters.

Our Choices

A considerable jump in consumer confidence is only indicative of the extent to which the U.S. consumer’s purchasing power has increased. Given the outlook of consumer depicted in this report, it is likely such trends will continue for the rest of the third quarter.

Adding consumer discretionary stocks to your portfolios makes great sense at this point. However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. 

Rocky Brands, Inc. (RCKY - Free Report) is a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Rocky Outdoor Gear, Georgia Boot, Durango, Lehigh, and the licensed brand, Dickies.

Rocky Brands has a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the last 60 days. The stock has returned 16.8% year to date, outperforming the industry, which has gained 5.6% over the same period.

SodaStream International Ltd. (SODA - Free Report) is engaged in the manufacture, distribution and sale of home beverage carbonation systems.

SodaStream has a VGM Score of B. The company has expected earnings growth of 33.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.6% over the last 30 days. The stock has returned 52% year to date, outperforming the industry, which has lost 5.6% over the same period.

Johnson Outdoors Inc. (JOUT - Free Report) is a designer manufacturer and marketer of outdoor equipment, marine electronics, watercraft and diving products.

Johnson Outdoors has a VGM Score of A. The company has expected earnings growth of 100% for the current year. The Zacks Consensus Estimate for the current year has improved by 45.2% over the last 30 days. The stock has returned 62.8% year to date, outperforming the industry, which has lost 4.8% over the same period.

Central Garden & Pet Company (CENT - Free Report) is a leading producer and marketer of premium and value-oriented products focused toward the lawn & garden and pet supplies markets in the U.S.

Central Garden & Pet has a VGM Score of A. The company has expected earnings growth of more than 19.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.6% over the last 30 days. The stock has returned 5% year to date, outperforming the industry, which has lost 5.6% over the same period.

Crocs, Inc. (CROX - Free Report) is a rapidly growing designer, manufacturer and marketer of footwear for men, women and children under the CROCS brand.

Crocs has a VGM Score of B. The company has expected earnings growth of 92.6% for the current year. The stock has returned 28.3% year to date, outperforming the industry, which has gained 0.3% over the same period.