Retail Sales See Solid Start To 2016: 4 Mutual Fund Picks

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Includes: FDLSX, FSCPX, FSRPX, PGCOX
by: Zacks Funds

Markets may be tanking this year, but consumer spending isn't. Retail sales are off to a good start, indicating strength in consumer spending. Decline in the unemployment rate and a rise in wages led to higher retail sales numbers for the month of January. Moreover, contrary to most analysts' expectations, retail sales ended 2015 on a stronger note.

Consumers mostly bought big ticket items and online store sales moved north. Separately, home improvement stores including The Home Depot, Inc. (NYSE:HD) witnessed a pick-up in sales for roofs, countertops and dishwashers.

Given the healthy pattern of consumer spending, it will be wise to invest in funds linked to the retail industry. Additionally, companies within the retail space boast strong fundamentals, affirmed by their upbeat fourth quarter earnings numbers.

Consumer Spending Rise in January

The Commerce Department said on Friday that U.S. retail sales moved north in January. Sales at retail stores and restaurants rose 0.2%, banking on increased sales of new cars as well as groceries and home supplies.

Car sales at a seasonally-adjusted annualized rate ("SAAR") increased to 17.55 million units in Jan. 2016 from 17.32 million units in Dec. 2015, the highest SAAR for any January since 2006. Sales at food and beverage stores increased 0.5%. American households also shopped more online, which eventually boosted retail sales. Online shopping went up 1.6%, the highest in almost a year.

Meanwhile, the so-called core retail sales figure that excludes automobiles, gasoline, building materials and food services increased 0.6% in January following a decline of 0.3% in December. The core retail sales tally corresponds closely with GDP's consumer spending component.

However, sales at gas stations fell 3.1% due to low fuel prices. Cost of gas sank below $2 a gallon in many parts of the country, a level that was witnessed almost seven years ago. Nevertheless, retail sales increased 0.4% after omitting gasoline.

January registered the fourth consecutive month of increase in sales as December's figures were also revised sharply higher. December's figures showed a gain of 0.2%, in contrast to an earlier estimate of a 0.1% decline. This shows that consumer spending ended on a positive note in 2015.

Upbeat Labor Market

Retail sales rose in January in spite of the turmoil in the global financial markets and snowstorms paralyzing the Northeast last month. Steady hiring and higher wages helped consumers to step up their purchases in January. The U.S. unemployment rate was 4.9%, the lowest since Feb. 2008. Many analysts believe that it is close to "full employment." The rate was also significantly down from the peak of 10% in Oct. 2009.

President Barack Obama had said that "the progress we've made going from 10% to under 5%, that's a testament to American workers, American businesses, American people being resilient and sticking to it." Moreover, average hourly wage growth increased to 2.5% in January compared to year-ago levels. Wages grew in January at the best pace in about six years. Wage growth picked up momentum after remaining almost flat for several years following the recession.

4 Retail Fund Picks

Along with strong retail sales numbers in 2016, companies related to the retail sector also recorded impressive fourth quarter earnings results. As of Feb. 12, retail/wholesale companies from the S&P 500 that have so far reported fourth quarter results showed an 11.8% year-on-year jump in revenues and a 6.8% increase in earnings.

The Consumer Discretionary sector also posted year-over-year earnings growth of 4.3% and revenue growth of 1.9%. On the other hand, total earnings for the 382 S&P 500 members that have reported results are already down 6.4% on 4.6% lower revenues.

Banking on commendable fourth quarter earnings results and a solid start to consumer expenditure this year, it will be prudent to invest in retail-focused mutual funds. A major part of consumer spending goes into the retail sector.

Moreover, these funds from the retail sector have impressive 3-year and 5-year annualized returns, carry a lower expense ratio, have minimum initial investment within $5000 and possess a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy).

Fidelity Select Consumer Discretionary Portfolio (MUTF:FSCPX) seeks growth of capital. This fund invests a large portion of its assets in securities of companies involved in the manufacture and distribution of consumer discretionary products and services. FSCPX comes under the consumer cyclical funds category. As of the last filing, Amazon.com Inc. (NASDAQ:AMZN), Walt Disney Co. (NYSE:DIS) and Home Depot Inc. were the top holdings for FSCPX.

FSCPX's 3-year and 5-year annualized returns are 10.6% and 10.9%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.41%. FSCPX has a Zacks Mutual Fund Rank #1.

Fidelity Select Leisure Portfolio (MUTF:FDLSX) seeks capital appreciation. FDLSX invests the majority of its assets in securities of companies engaged in the design, production or distribution of goods or services in the leisure industries. FDLSX comes under the category of consumer cyclical funds. As of the last filing, Starbucks Corp. (NASDAQ:SBUX), Yum Brands, Inc. (NYSE:YUM) and McDonald's Corp. (NYSE:MCD) were the top holdings for FDLSX.

This fund's 3-year and 5-year annualized returns are 11.1% and 11.2%, respectively. Annual expense ratio of 0.80% is lower than the category average of 1.41%. FDLSX has a Zacks Mutual Fund Rank #2.

Putnam Global Consumer A (MUTF:PGCOX) seeks growth of capital. This fund invests a major portion of its assets in securities of companies in the consumer discretionary products and services industries. PGCOX is a non-diversified fund. PGCOX comes under the category of consumer defensive funds. As of the last filing, Amazon.com Inc. (AMXN), Coty Inc. (NYSE:COTY) and Re Max Holdings Inc. were the top holdings for PGCOX.

PGCOX's 3-year and 5-year annualized returns are both 7.9%. Annual expense ratio of 1.26% is lower than the category average of 1.43%. This fund has a Zacks Mutual Fund Rank #1.

Fidelity Select Retailing Portfolio (MUTF:FSRPX) seeks capital appreciation. FSRPX invests a large portion of its assets in securities of companies engaged in merchandising finished goods and services primarily to individual consumers. FSRPX comes under the category of consumer cyclical funds. As of the last filing, Home Depot Inc., Amazon.com Inc. and Priceline.com Inc were the top holdings for this fund.

FSRPX's 3-year and 5-year annualized returns are 15.9% and 16.1%, respectively. Annual expense ratio of 0.81% is lower than the category average of 1.41%. FSRPX has a Zacks Mutual Fund Rank #2.

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