The fourth successive monthly increase in retail sales was one of the most positive developments the U.S. economy has experienced in recent times. Powered by an improving job market, wage growth and low gasoline prices, retail sales increased more than estimated in January. Further, the decline reported for December was revised to an increase.

Such data indicates that U.S. consumers are deriving confidence from strong economic fundamentals. They seem to be unperturbed by the turmoil the markets are going through. This is why it makes good sense to pick up select retail stocks at this time.     

Successive Monthly Increases

Retail sales gained 0.2% in January, keeping up with the increase recorded for the month of December. This was also higher than the consensus estimate of a 0.1% increase. Initially estimated to decline by 0.1%, retail sales for December were revised upward to a 0.2% increase according to fresh estimates. After excluding the impact of low gasoline prices, the metric increased by 0.4%.

Of the 13 broad categories, 8 experienced an upswing in demand over the month of January. Online purchases increased 1.6%, recording the strongest gain in 11 months. Grocery store sales increased 0.8% while motor vehicle and parts dealers experienced a 0.6% gain. Gardening equipment and building material supplies dealers experienced a 0.6% increase. 

Multiple Factors Fueling Gains

A resurgent labor market and strong wage gains were a major factor fueling purchases. Even though the U.S. economy added only 151,000 jobs in January, missing the consensus estimate of 195,000, there were gains on other fronts. The unemployment rate declined from 5% in December to 4.9% in January, the lowest level witnessed since 2008.

But more importantly, average hourly earnings gained nearly 0.5% in January from the previous month’s figure to $25.39, higher than the consensus estimate of a 0.3% rise. Average hourly earnings witnessed a 2.5% rise from the year-ago figure.

Another major factor increasing the purchasing power of the consumer is extremely low gasoline prices. Despite the occasional rebound, a widening demand supply gap is continuing to depress gasoline prices.

According to the Automobile Association of America (AAA), the cost of gasoline was recorded at $1.69 per gallon on Tuesday. This is a 3 cent decline compared to last week and 21 cents or 11% lower than prices recorded about a month earlier. This has raised the consumer’s purchasing power, giving them the freedom to spend on other goods and services.

Our Choices

Continual growth in retail sales is indicative of the confidence being exuded by the U.S. consumer. A number of economic fundamentals are fueling this growth which means it is likely to be stable over the near future.

This is why the retail sector makes for a good investment area at this point. Stocks from these sectors are expected to provide steady performance in the days to come. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

The Kroger Co (KR - Analyst Report) is one of the nation’s largest grocery retailers operating 2,774 supermarkets and multi-department stores in 35 states and the District of Columbia.

Kroger has a Zacks Rank #2 (Buy) and projected growth for the current year is 9.4%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.20, lower than the industry average of 18.10.

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

Central Garden & Pet Co has a Zacks Rank #1 (Strong Buy) and expected earnings growth of 45.9% for the current year. It has a P/E (F1) of 13.18, lower than the industry average of 18.90. Its earnings estimate for the current year has improved 13.7% over the last 30 days.

O'Reilly Automotive Inc. (ORLY - Analyst Report) is the third-largest specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the U.S.

O'Reilly Automotive has a Zacks Rank #2 and expected earnings growth of 13% for the current year. Its earnings estimate for the current year has improved 2.2% over the last 30 days.

Builders FirstSource, Inc. (BLDR - Snapshot Report) is a leading supplier and manufacturer of structural and related building products for residential new construction in the U.S.

Builders FirstSource has a Zacks Rank #1 and its projected growth for the current year is more than 100%. It has a P/E (F1) of 7.22, lower than the industry average of 18.10.

The Priceline Group Inc. (PCLN - Analyst Report) is one of the largest online travel companies in the world.

Priceline has a Zacks Rank #2 and its estimated growth for the current year is 19.5%, compared to industry average of 16.1%.It has a P/E (F1) of 16.40.