Macro Trends Support Consumer Stocks
Effects of Falling Gas Prices
Top 3 Consumer Stocks for 2015
Consumer stocks were some of the best performers in 2014, with many retailers showing extraordinary strength toward the end of the year. Costco (COST) and Wal-Mart (WMT) both advanced about 15% from October 17 (the end of the October correction) to December 31, while Target (TGT) raced ahead an even more impressive 28%. (The S&P 500 gained 11% in the same period.)
The holiday "shopping season" is over now, but all the macro trends that drove consumer stocks to new heights in December are still in place. The U.S. economy is expanding at the fastest pace in over a decade, and consumer spending is at its highest level since 2008, according to Gallup.
Oil prices are still falling, which is bad news for U.S. energy companies (and probably North Dakota) but great news for most consumers. With gas prices at their lowest levels in five years, consumers have more money in their pockets to spend on everything else-from groceries to TVs. And they're driving more, which leads to higher spending on auto parts and travel.
Truck and SUV sales are even getting a boost from low gas prices, short-sighted as that seems. Pickup trucks, minivans and SUVs outsold cars in every month of 2014. And sales of Cadillac Escalades and Ford Expeditions, two of the largest SUVs, rose 55% and 19%, respectively.
Given these economic conditions, it's no wonder that retailers and other consumer stocks are investor favorites today.
And there's no reason to believe these trends won't continue in 2015. Gas prices continue to fall, and the labor market is firming. Against this backdrop, I expect consumer-driven names to be some of the best-performing stocks in early 2015.
I'm currently recommending several income-generating plays on this trend in my premium advisory, Cabot Dividend Investor. And as a bonus, since they're all well-established dividend payers, they're better equipped to ride out market volatility (which we're already seeing a lot of in 2015) than non-dividend-paying stocks.
If that sounds like an appealing combination to you, you might be interested in Cabot Dividend Investor yourself-and you can try it out with no risk by clicking here. If you're not sure, here's a taste of the kind of growth-and-income plays you'll find in it. These are three of my real, current recommended buys to my Cabot Dividend Investor subscribers.
Consumer Stock #1:
The first is Church & Dwight Co. (CHD), which owns well-known consumer brands including Arm & Hammer, OxiClean and Trojan. The stock has advanced almost non-stop over the past year, spurred by U.S. economic growth and strong consumer spending (we currently have a 25% total return in the Cabot Dividend Investor portfolio). Analysts are predicting 8.6% revenue growth this year and 8.9% growth next year.
I like the stock because the company has a long history of turning revenue growth into dividend growth, raising the dividend by 11% per year on average since 2009. I'm currently recommending CHD as a Buy for investors who want both stock price appreciation and dividend growth.
Consumer Stock #2:
My second consumer stock also owns some well-known consumer brands, although they target an admittedly more niche market. It's Reynolds American (RAI), the second-largest U.S. tobacco company. Although cigarette demand isn't really subject to the same forces as other consumer spending, there are two major catalysts in the pipeline for Reynolds.
One is the pending acquisition of Lorillard, initiated in June 2014 and likely to be completed in 2015, if anti-trust regulators approve. The second is the growing popularity of e-cigarettes, which are reinvigorating the stagnant tobacco industry. Reynolds manufactures Vuse e-cigarettes, and introduced a second brand of vapor cigarettes that use leaf tobacco (instead of nicotine oil) in November.
In the meantime, Reynolds's ultra-loyal customer base of cigarette smokers continues to generate predictable cash flow that supports a 4% dividend (increased every year since 2005). I'm currently recommending RAI as a Buy for long-term investors whose priority is dividend growth.
Consumer Stock #3:
Lastly, I mentioned Target's stellar performance above, but even with the stock's near-30% advance since mid-October, I still think TGT has gas in the tank today. The stock only recently surpassed its pre-data breach highs from 2013, driven by strong economic and consumer data, low gas prices and an estimate-beating earnings report.
New CEO Brian Cornell is steering the retailer in the right direction, putting focus back on the areas in which Target excels, like "cheap chic" home goods and apparel. The company is still offering steep discounts to draw shoppers, which may lower margins in 2015, but is expected to boost store traffic, which is still below where it was before the data breach.
We're sitting on a 38% total return in TGT in the Cabot Dividend Investor portfolio, but I'm still recommending Target as a buy for investors who want price appreciation and safe and growing dividend income.
And remember, if you like these picks, you can take a no-risk trial subscription to Cabot Dividend Investor today and get access to my whole portfolio of income-generating ideas. Just click here for more information.
Chloe Lutts Jensen
Chief Analyst, Cabot Dividend Investor