17 Stocks to Benefit From Consumer Confidence

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 and gasoline, putting more money back in consumer pockets despite recent wage slack,” says Brian Belski, chief investment strategist at BMO Capital Markets.

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 one-cent drop in gas prices at the pump adds $1 billion to household discretionary spending at an annualized rate, says Phil Orlando, senior market strategist at Federated Investors.

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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 Peter Dixon, manager of Fidelity Select Consumer Discretionary Portfolio (FSCPX). “There’s always a brand, product or category that’s resonating with consumers,” he says.

Dixon’s holdings reveal categories he favors, including housing, e-commerce and auto parts. Home Depot (HD, $98.94) and online travel company Priceline Group (PCLN, $1,075.34) are among his five biggest positions. Among auto-parts companies, Dixon says, he’s leaning toward aftermarket retailers, including AutoZone (AZO, $602.46) and O’Reilly Automotive (ORLY, $192.20). “The average age of vehicles is increasing,” says Dixon. “Cars are better-made, and people are keeping their cars longer.” (Share prices are as of December 17.)

The trick to finding stocks to hold for the long term is to find companies with “an addicted customer base,” says William Smead, CEO of Smead Capital Management, in Seattle, who has 37% of his clients’ assets invested in consumer-discretionary stocks. He’s looking for substantial long-term earnings growth from a number of high-quality holdings, including clothing retailer Nordstrom (JWN, $75.77) and Cabela’s (CAB, $49.89), a specialty retailer for campers, hunters and other outdoor enthusiasts. Smead also recommends media and theme park giant Walt Disney Co. (DIS, $91.38) and TV station and newspaper owner Gannett (GCI, $30.41).

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 Kate Spade & Co. (KATE, $29.88) and Michael Kors Holdings (KORS, $75.65). He also recommends two high-end European automakers with an avid U.S. customer base: BMW (BAMXY, $34.85) and Daimler (DDAIY, $76.62), which makes Mercedes-Benz vehicles. (Both stocks trade as American depositary receipts on the “pink sheets,” the non-Nasdaq over-the-counter market.)

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 Lennar Corp. (LEN, $43.11), says Orlando, or indirectly, with related businesses such as Home Depot or paint maker Sherwin Williams (SHW, $252.33).

Analysts at Bank of America Merrill Lynch prefer the shares of companies that make or sell the stuff we use every day, such as diapers, toothpaste or breakfast cereal—so-called consumer-staples stocks. That makes sense because falling gasoline prices have the biggest impact on families who do most of their spending on such necessities. Kimberly-Clark (KMB, $113.86), General Mills (GIS, $52.19) and Wal-Mart Stores (WMT, $84.23) are among those staples stocks that have shown the least correlation with oil prices in the past—so when oil is falling, they have a good chance of rising.