American consumers have a lot to smile about these days. That means things are looking up for consumer stocks, too. The stocks typically do well in the early stages of an economic recovery, and this one has been no exception. Stocks of companies that make or sell things that we want but don't necessarily need--so-called consumer-discretionary stocks--have been the stock market's top-performing sector over the past five years. And although the group has lagged the market this year, the odds are good that the stocks will rebound in 2015.
The signs of consumer strength are multiplying. The economy has added at least 200,000 jobs a month since February, while households have whittled debt as a percentage of disposable income from a peak of 135% in 2007 to 108% today. Wage increases have been modest, but purchasing power has improved. "The drop in commodity prices and interest rates has greatly reduced the costs associated with mortgages, food and gasoline, putting more money back in consumer pockets despite recent wage slack," says
The near 50% drop in crude oil prices since June translates into a hefty energy dividend for consumers and the businesses that cater to them. The rule of thumb is that every
Add stock and home-price gains to the mix, and it's little wonder that consumer-confidence levels are the highest they've been since 2007. The proof is at the cash register: Retail sales in November posted the strongest gains since March, powered by solid sales in autos, building materials and clothing.
Consumer-discretionary stocks may not appeal to demanding bargain hunters. The sector sells at 17 times estimated 2015 earnings, compared with 15 for Standard & Poor's 500-stock index. But S&P Capital IQ figures that discretionary stocks will log earnings growth of 17% in 2015, the best of any S&P sector, and well above the 9% growth expected for the S&P 500. And careful investors can easily find opportunities, says
Dixon's holdings reveal categories he favors, including housing, e-commerce and auto parts.
The trick to finding stocks to hold for the long term is to find companies with "an addicted customer base," says
Federated's Orlando thinks improving economic growth bodes well for companies that cater to consumers with a taste for luxury. Among designer-apparel and accessory stocks, Orlando favors
Orlando also sees potential in the housing recovery. He expects sales of new homes to double over the next few years, from about 600,000 a year now to 1.2 million. Invest directly with homebuilder