From the Consumer's Wallet to Yours

Today we continue our journey through earnings season. I’ve dedicated the next two weeks to watching every earnings report, and to being there to help you navigate towards the biggest winners and away from the biggest losers—and boy are things heating up.

Yesterday, I gave you my full analysis on three semiconductor stocksIntel Corp. (INTC), Advanced Micro Devices (AMD) and Texas Instruments Inc. (TXN).

And, after the closing bell on Tuesday, we received first-quarter operating results from Intel Corp. Compared with the same quarter last year, Intel’s adjusted earnings dipped  11% to $2.88 billion, or $0.56 per share. However, earnings still trounced the $0.50 per share consensus by 12%. Over the same period, net sales climbed to $12.91 billion, also topping analyst estimates of $12.84 billion in sales. Looking ahead to the second quarter, management expects $13.6 billion in sales, which tops the Street view of $13.43 billion. Intel is particularly bullish about the launch of the first Intel-based smartphones next quarter.

And while I also expect INTC to continue to post strong earnings and richly reward investors, there is another sector and group of stocks that I expect to perform even better this earnings season. And the best part about it is that no one sees this coming.

I’ve taken a ton of grief for recommending stocks from this sector. But you should not let your fears or the misguided words of so-called experts keep you from the explosive growth that’s just on the horizon.

I’m talking about retail and consumer stocks.

Some of my biggest winners have come from stocks everyone else pronounced “dead” when the recession hit. Dead is fine with me when I’m locking in gains like these:

Apple Inc. (AAPL)—sold for a 252% gain in October 2008.
Colgate-Palmolive (CL)—sold for a 32% gain in September of 2009.
Ford Motor Co. (F)—sold for a 43% gain in February 2011.
Amazon.com (AMZN)—sold for 116% gain in April 2011.

And then there are the stocks my Blue Chip Growth members are still profiting from today:

Our auto parts retailer—up 41% to date.
Our restaurant stock—up 66% to date.
Our discount retailer—up 51% to date.
Our specialty retailer—up 48%.
Our apparel stores company—up 106%.
Our travel company—up 226%
Our consumer electronics company—up 220%.

These stocks all have one thing in common. They all rely on consumer spending—something the experts have been saying is non-existent since 2008. So much for that.

So, today, I’m going to take you through three retailers that I see as strong buys this earnings season.

Three Mouth-Watering Retail Stocks—and Three to Keep Off Your Plate

Lately, we have been receiving what seems like wave after wave of strong sales growth from the retail sector. At the beginning of this month, 12 retailers reported March same-store sales figures, and the results were quite positive; the average retailer posted 6.9% same-store sales growth while the consensus called for 5.3% growth. And, just a few days ago, general March retail sales figures were released, and they reaffirmed that spring is shopping season for the U.S. Overall, March retail sales climbed 0.8% while economists expected it to rise just 0.3%. Even excluding auto sales, which had before been inflating the headline figure, sales still climbed 0.8%.

And, this sales growth applies to more than just your traditional retailers like department stores and specialty stores—consumers are also embracing eating out once again, and this is great news for three premium quick-service chains that I’d like to highlight today.

First up is Chipotle Mexican Grill Inc. (CMG), which is quickly becoming America’s burrito chain of choice. And, with top-of-the-line ingredients like barbacoa beef and fresh guacamole, it’s easy to see why.  Even in the face of rising food prices, Chipotle has continued to grab market share because consumers are willing to pay a premium for these healthier and heartier alternatives to the typical burger joint. So, this company’s same-store sales have been growing by at least 10% for the past three quarters; last quarter, the company posted 24% year-over-year sales growth and earnings growth. And Chipotle is putting this cash to good use: The gourmet burrito guru is in the middle of an aggressive expansion campaign in which it plans to open as many as 165 new stores this year. This is an A-rated stock with tremendous growth prospects.

Another hot alternative to the usual fast food is Starbucks Corp.  (SBUX), which is known for its specialty coffee concoctions and teas. The company is clearly the big kahuna when it comes to coffee. Travel to any major urban center in the U.S. and I can guarantee that you’ll only be a few blocks away from a Starbucks location. But while Starbucks may have started in the U.S., the company has enjoyed robust sales in Asia in recent months that have driven its earnings higher. The company is also expanding its product offering through the recent acquisition of Evolution Fresh, a leader in the $3.4 billion cold-crafted juice industry. Despite its reputation for a $4 cup of coffee (and counting), consumers still go to Starbucks to get their caffeine fix, and they don’t show any signs of stopping. This is also an A-rated stock.

My last premium consumer stock may come as somewhat of a surprise to you—McDonald’s Corp. (MCD). And though this fast food institution may not seem very sexy or trendy at first, this company has been working double-time to reinvent its brand. And, so far, it’s working like a charm. In December, the company shelled out $2.9 billion to jumpstart the brand, with the money going towards updating franchise locations with free Wi-fi and flat-screen TVs as well as nicer furniture and better decorations. The company also announced a new CEO at the end of March, signaling the end of a seven-year dynasty under Jim Skinner. And, over the past few quarters, McDonald’s has been accelerating same-store sales at a rate almost unheard of for such an established chain. You really can’t go wrong with this A-rated stock because to top it all off, MCD pays a 2.9% dividend yield.

CMG Stock Analysis

<td width="20" align="center" valign="top" style="border:#3399CC solid thin;"A

Fundamental Garde: B
Sale Growth: B
Operating Margin Growth: C
Earnings Growth: B
Earnings Momentum: B
Earnings Surprises: D
Analyst Earnings Revisions: B
Cash Flow: C
Return on Equity: A
Qualitative Grade: A
Total Grade:
SBUX Stock Analysis
Fundamental Garde: B
Sale Growth: B
Operating Margin Growth: B
Earnings Growth: C
Earnings Momentum: C
Earnings Surprises: C
Analyst Earnings Revisions: B
Cash Flow: C
Return on Equity: A
Qualitative Grade: A
Total Grade: A
MCD Stock Analysis
Fundamental Garde: C
Sale Growth: C
Operating Margin Growth: C
Earnings Growth: B
Earnings Momentum: C
Earnings Surprises: C
Analyst Earnings Revisions: C
Cash Flow: C
Return on Equity: A
Qualitative Grade: A
Total Grade: A

Of course, not all retailers and food chains are created equally—there are plenty of brands that are lagging behind. While I want you to focus on the three I listed above, I also want you to keep these next three companies in mind so that you can keep them out of your portfolio.

First up is Denny’s Corp. (DENN), which is a family restaurant chain with over 1,500 restaurants in the U.S., most of which are located off the major interstates to draw in travelers. And, while the company has been able to accelerate operating margin growth and earnings growth, this stock has lackluster sales growth and a poor track record of earnings surprises. DENN is a C-rated stock.

I also want you to avoid Sonic Corp. (SONC), which is a drive-in fast food chain that sells traditional quick fare like hot dogs, hamburgers and milkshakes. And while its happy-hour specials may tempt consumers, the company’s mediocre sales and earnings growth has kept buying pressure flat among investors. This is a D-rated stock.

Finally, I’m not impressed with Ruby Tuesday Inc. (RT), which is an Americana casual dining chain that takes its name from The Rolling Stones’ hit. There are 800 Ruby Tuesday locations worldwide, and the company has been working to make its menu and atmosphere more upscale. However, the company clearly hasn’t been successful lately because saecme-restaurant sales have been declining as has the company’s bottom line, which decreased 26% in the last quarter. The only bright spot for this company is its cash flow; all other fundamental metrics are D- or F-rated. So, RT earns and F and I strongly rommend that you stay away from it.

The Hits Keep Coming

I want you to watch your inbox every day this week as we’re going to tackle a new sector, discuss the opportunities and pitfalls, and home in on the stocks to buy and sell this earnings season.

Next up are the big, bad banks. I’ll give you the inside story on what’s going on with their recent run and if you should be a buyer. And then on Friday, we’re going to cover the heavy hitters in the Internet sector.

This is an important Market 360 earnings series that you won’t want to miss, so keep your eyes peeled for daily updates from me.

Sincerely,

Louis Navellier

Louis Navellier

P.S. For access to more earnings season winners, try my Blue Chip Growth newsletter. I have 35 stocks primed for earnings season and you can get them risk-free.

More Louis Navellier

Twitter

Facebook

RSS Feed

Little Book

InvestorPlace Network

InvestorPlace.com