Five Consumer Stocks to Watch

SMITH BRAIN TRUST -- The near-50 percent oil price decline over the past six months -– “the equivalent of a large tax cut for U.S. consumers” –- is boosting the value of companies that produce consumer-oriented products, says David Kass, clinical associate professor of finance at the University of Maryland's Robert H. Smith School of Business. Kass says consumer stocks are helped when factoring in the U.S. economy’s recovery from the 2008-09 financial crisis, including the GDP’s expected 3 percent rate of growth in 2015, and the unemployment rate decline since 2009. “Consumers over the next few months and years will have higher disposable incomes, which should benefit the profits and share prices of consumer stocks,” says Kass, who blogs about Warren Buffett and investing. He recently commented on consumer stocks for U.S. News and World Report. He says five stocks worth looking at for 2015 and beyond are:

-- General Motors (GM). GM reported higher than expected earnings for the fourth quarter and plans to increase its dividend so the shares will yield over 4 percent. Although GM is still in the process of settling claims relating to defective ignition switches, its outlook is bright since there is a pent-up demand for new cars from consumers who have held back making large ticket purchases in recent years as a result of the Great Recession. The average age of cars on the road exceeds the historical average and, therefore, are likely to be replaced by new vehicles in the near future. Also lower oil prices are likely to result in the purchase of larger vehicles (with higher profit margins) by consumers. After going through the bankruptcy process, GM today is very well managed.

-- DirecTV (DTV). AT&T’s proposed acquisition of DirecTV is likely to be approved by regulators over the next few months. The combination should provide investors with a conservative consumer related investment.  AT&T will exchange its shares, currently yielding 5.5 percent, and cash at a premium over today’s price for DTV. DTV is a satellite provider of all NFL games as well as other programming. It also has a large market share in South America with substantial growth potential.

-- Johnson & Johnson (JNJ). JNJ is a very well managed and well diversified pharmaceutical and consumer products company. A new CEO, a few years ago, has turned this company around after JNJ experienced several major recalls of over-the-counter products. Its outlook is very bright and it currently pays a 3-percent dividend.

-- Costco Wholesale (COST). This very well run wholesale membership club for consumers has been growing rapidly in recent years. Its outlook continues to be bright. It currently pays a 1 percent dividend.

-- Wal-Mart Stores (WMT). The largest retailer in the U.S. enjoys a major cost advantage over its competitors. Its outlook looks bright both as result of lower oil prices and the improving economy. It currently pays a 2 percent dividend.

Kass says consumer stocks, especially those he highlights, should be affected less than other stocks by overall stock market volatility from unpredictable international political and economic events and by the strengthening dollar, which could negatively affect reported earnings of large U.S. multinationals. What’s the ideal consumer-stock percentage for an investor’s portfolio? Look to the GDP, Kass says. Since about 68 percent the of U.S. GDP results from consumer spending, he says it is reasonable for portfolios to be comprised of a similar percentage of consumer stocks. “Since the earnings of consumer stocks are more stable than those of industrial issues, and the share prices of consumer stocks are less volatile, they represent a conservative approach to investing,” he says.

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