How to Bet on the U.S. Consumer

One of the brighter spots in the U.S. economy is the consumer, who is doing fairly well overall.

U.S. job growth is increasing, jobless claims are down and gasoline prices remain significantly lower from last year. People are also feeling a little more chipper, as the University of Michigan's final sentiment index for February suggested consumer confidence at the end of last month remained relatively strong despite stock market turbulence in January.

Although retail sales fell to a seasonally adjusted 0.1 percent in February, a large part of that was due to cheaper gas prices. The core retail sales report, which removes volatile prices from fuel, autos, building materials and grocery stores to smooth out readings, was unchanged in February.

Lower gas prices puts as much as $700 more per year in the hands of consumers, says Seattle-based Patty Edwards, managing director of investments at U.S. Bank Wealth Management.

[See: 7 Stocks That Will Ruin Your Portfolio.]

"People have been getting wage increases, and the consumer has been feeling better," she says.

Pat O'Hare, chief market analyst at Briefing.com, a Chicago-based research firm, says while consumer spending hasn't been "excessively" strong, in the face of a slowdown in manufacturing, "the consumer is holding up reasonably well."

Job growth translates into higher earnings, which means more spending by the consumer, he says. Further, persistent low interest rates make it more attractive to finance large purchases such as automobiles and homes.

Some market analysts are surprised that consumers haven't spent even more money because of the low gasoline prices. Cheap fuel gives some support for consumer spending, O'Hare says.

[Read: 10 Out-of-the-Box Ways to Save Money.]

Consumers may have held off spending because expectations were that the low gas prices wouldn't last, but that attitude may be changing, Edwards says. Based on consumers' spending patterns, some companies are benefiting more than others, so investors looking to ride the wave of consumers shopping more need to do a little homework.

Be selective. The pickup in spending isn't being driven by the upper middle class this time, as they are more influenced by how their investments are faring.

"What we're seeing is the spending is coming from the budget-conscious consumer. It seems to be helping the lower-end consumer. If you watch the earnings reports, you'll see that," Edwards says. "The budget-conscious consumer spending is because of both jobs and gas."

That hasn't completely benefited companies like Wal-Mart Stores (ticker: WMT), which is suffering from sluggish same-store sales, says Joe Agnese, equity analyst at S&P Global Market Intelligence in New York.

"But [Wal-Mart still has] some support from the low gas prices, and that's a beneficial impact to their core consumer [who] skews to the middle to low income, where gas is a greater percentage of their overall spending," he says.

Wal-Mart may be struggling, but Agnese says a close peer, Costco Wholesale Corp. (COST), has done well. Costco sells both consumer staples and discretionary goods, and in a recent earnings call, the big-box retailer said sales of televisions, phones and cameras were strong.

Consumer spending isn't happening in the malls.

"We're spending less in the old-fashioned mall experience. You can go to the mall on a Saturday and there are still people there, but the retailers have to offer something that's unique, that you can't see at a large department store," Edwards says.

Instead, consumers are spending in three core areas, O'Hare says.

"There's now an emphasis on travel, dining out and certainly home improvement. Those are three areas that have held up quite well [and] are three areas that if consumer spending and confidence picks up further, would be poised to see better returns," he says.

This emphasis on eating out more is having an impact on supermarkets, Agnese says.

"In food distribution, customers are shifting and trade up and out from supermarkets to restaurants, [which] helps out firms like Sysco (SYY), which distributes to restaurants," he says.

Two other areas that have been under-the-radar beneficiaries of budget-consumer spending are tobacco companies and drug stores, Agnese says.

While tobacco sales overall have been declining, Agnese says the contraction in sales is much smaller. "Tobacco sales are a clear indication of volume support as gas prices dropped. They benefited since early last year from the drop in gas prices," he says.

[See: Trucking Stocks Face an Uncertain Future.]

Additionally, drugstores like CVS Health Corp. (CVS) and Walgreens Boots Alliance (WBA) are seeing a pickup in non-prescription sales for goods like cosmetics and other higher-priced convenience items.

"Even in the pharmacy, during the [economic] slowdown, consumers were splitting their pills [to save money]. That's not happening now, which is a good thing," he says.

Edwards says the pickup in spending by the lower-income consumer is positive for the overall economy.

"It's nice to see that other people are doing well," she says. "We're seeing spending across the spectrum. The old saying that a chain is only as strong as its weakest link, so it's not just the upper end that's doing well. It's good to see more of a groundswell."

Think value. The stock market volatility prompted some upper-middle-class consumers to hold tight to their purse strings, and it's hurting some of the higher-end retailers, including Nordstrom (JWN), Ralph Lauren Corp. (RL) and Tiffany & Co. (TIF), O'Hare says. But, he adds, long-term investors might want to consider some of these names.

"The stocks of those companies ... they've all been cut down to size in a big way. But consumers are going to come back around. This is a cyclical business. There's longer-term investment potential at these levels for those beaten-up names in the apparel space and the jewelry space for the patient-minded investors," he says.

If the stock market volatility calms down and employment growth continues on its current pace along with rising income growth, these retailers may come back.

"You'll see more spending in these names like Polo/Ralph Lauren and Tiffany. And [consumers will] be looking for the bargains, which will be readily available in the department store space because those retailers will need to price attractively to get those consumers in their stores," he says.

Debbie Carlson has more than 20 years experience as a journalist and has had bylines in Barron's, The Wall Street Journal, the Chicago Tribune, The Guardian, and other publications. Follow her on Twitter at @debbiecarlson1.