Consumer spending increased appreciably last month, ahead of estimates and up significantly over December’s figures. Meanwhile, GDP was revised upward in the second estimate though consumer spending dipped marginally in the report. However, digging deeper into the GDP report, we can see that spending has shown a significant improvement from 2014 levels.

These reports indicate the consumer’s spending power has increased significantly. As a result of higher purchasing power, restaurant sales are projected to move upward this year. Adding stocks from this segment to your portfolio makes for a prudent option at this time.

Spending Pace Hits 8-Month High

A 0.5% increase in personal consumption during January was the fastest experienced over the last eight months. According to a report from the Commerce Department, income also increased at 0.5%, the tenth consecutive time it has moved upward and the highest since Jun 2015. Together, these metrics indicate how the consumer’s spending capacity has grown.

In December, personal spending had increased by only 0.1%. Additionally, January’s increase was higher than the consensus estimate of a 0.3% increase. The identical increase in income was supported by a 0.6% rise in wages and salaries during January. In December, wages and salaries had increased by only 0.2%. The jump experienced in January can be attributed to the effect of a hike in minimum wages. 

GDP Revised Upward

According to second estimate data released simultaneously, fourth quarter GDP increased at 1%. This is an improvement over the initial estimate of a 0.7% rise. However, the upward revision is being attributed to a similar revision in the value of inventories. Inventories increased $81.7 billion, higher than the prior estimate of $68.6 billion.

Additionally, consumer spending for the quarter was revised downward to 2%, from the earlier estimated pace of 2.2%. However, personal consumer expenditure increased by 3.1% over 2015, compared to rises of 1.7% and 2.7% in 2013 and 2014, respectively. Further, disposable personal income rose 3.4% in 2015, compared to a 2.7% increase in 2014 and a 1.4% decline in 2013.  

Restaurant Sales Tipped to Grow

Higher purchasing power and the willingness to spend bode well for consumer discretionary sectors such as restaurants. According to the industry forecast for 2016 released by the National Restaurant Association (NRA) earlier this month, sales at restaurants are projected to increase over the year. The NRA estimates that restaurant sales will touch $782.7 billion in 2016. The industry will provide employment to 14.4 million individuals over one million or more locations.

This year, real sales for restaurants are expected to increase for the seventh consecutive time. Yet, variations may be noticed at the regional level due to local business conditions. Among the major trends expected to make a strong impact is a better informed customer and the rapid growth of snack and bars selling non-alcoholic beverages. 

Our Choices

A substantial increase in consumer spending over the last month indicates a greater desire to spend. This is backed up by a comparable increase in income levels. Data from the latest GDP report also indicates that consumer spending has gone from strength to strength since 2013.

Restaurants are one of the sectors poised to gain from this strong increase in purchasing power. This is supported by the industry’s recent projections and adding restaurant stocks to your portfolio would make for a smart move. Our selection is also backed by a good Zacks Growth Score blended with a bullish Zacks Rank.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space.

Texas Roadhouse, Inc. (TXRH - Snapshot Report) along with its subsidiaries is a full service restaurant chain. The chain offers an assortment of specially seasoned and aged steaks.

Texas Roadhouse holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘A’. The company has expected earnings growth of 24.4% for the current year. The earnings estimate for the current year has increased by 1.9% over the last 30 days.  

Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) is a full-service casual dining restaurant chain (named Red Robin Gourmet Burgers) that serves burgers.

Red Robin Gourmet Burgers holds a Zacks Rank #2 and has a Growth Style Score of ‘A’. The company has expected earnings growth of 11.7% for the current year. The earnings estimate for the current year has increased by 3.1% over the last 30 days.  

Sonic Corp. (SONC - Snapshot Report) is an operator and franchisor of one of the largest chain of drive-in restaurants in the U.S.

Apart from a Zacks Rank #2, Sonic Corp. has a Growth Style Score of ‘B’. The company has expected earnings growth of 19.2% for the current year. The earnings estimate for the current year has increased by 0.1% over the last 30 days.  

The Cheesecake Factory Inc. (CAKE - Analyst Report) operates upscale, casual, and full-service dining restaurants in the U.S.

The Cheesecake Factory holds a Zacks Rank #2 and has a Growth Style Score of ‘A’. The company has expected earnings growth of 11.9% for the current year. The earnings estimate for the current year has increased by 0.6% over the last 30 days. 

Bob Evans Farms, Inc. (BOBE - Snapshot Report) is an owner and operator of full service restaurants in the U.S. which have the Bob Evans Restaurants brand name.

Apart from a Zacks Rank #2, Bob Evans Farms has a Growth Style Score of ‘B’. The company has expected earnings growth of 17.5% for the current year. The earnings estimate for the current year has increased by 1.6% over the last 30 days.