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4 Sectors Likely to Thrive With an Improving Economy

Just how strong is the U.S. economy right now? Good question.

The Wizarding World of Harry Potter at Universal Studios, Orlando, FL
Gustavo Caballero | Getty Images
The Wizarding World of Harry Potter at Universal Studios, Orlando, FL

Tough answer. We picked four specific segments of the consumer economy and are taking a look inside the stocks to find some answers.

Hotels. Restaurants. Theme parks. Appliances.

Hotels:

The key take-away from the hotel sector is that as long as the job recovery continues, the growth trend in hotels should follow suit. The caveat: Don't expect that growth to be explosive. The basket of stocks we looked at are up an average of 12-percent in 2012.

After scouring the whole sector, three companies stood out for discussion — and possible investment.

Choice Hotels is a $2 billion chain that includes Comfort Inn and Econo Lodge.

Occupancy is up 50-percent from a year ago, and the nation's job growth is credited for the pop.

The key metric for all the hotels is REVPAR, or revenue per available room. For Choice, it was up almost 8-percent last quarter, and the company guided about double expectations for the present quarter. So, occupancy is up, and it's charging higher rates, which is a recipe for strong revenue and profit growth.

Marriott is an interesting company right now. The time share business is now spun off, yet it remains the second largest operator in the United States.

Yes, occupancy is trending down, and REVPAR growth is slowing. However, if you believe in the U.S. recovery, Marriott is nearly all-in. The company derives 80-percent of total revenues from the domestic business, so there's a risk there.

Intercontinental is smaller than Marriott, but relatively speaking, is more balanced overseas.

The brands you're most familiar with are Crowne Plaza and Holiday Inn. Internationally, it's accelerating growth in China and India, and don't forget, it yields almost 3.5 percent.

Restaurants:

Analyzing restaurants proved more difficult. The sector ranges from the high end (Darden's Capital Grille) all the way down to coffee and donuts (Dunkin Brands).

Generally, the sector is doing well, and beyond the favorable economic trends in the U.S., a warm winter has been great for business.

We talk so much about the McDonald's and Starbucks' of the world, so some smaller names emerged as worthy of your attention.

Texas Roadhouse Restaurant
Source: texasroadhouse.com
Texas Roadhouse Restaurant

Texas Roadhouse surely isn't acting small. While reporting strong earnings, it also raised its dividend and announced a stock buyback.

In addition, it's growing ’ but not too fast.

Darden made news this week because of its strong guidance. It's a high yielder (3.4 percent) and still has a P/E ratio well below its peer group.

With Darden, everyone knows Red Lobster and Olive Garden, but few know Bob Evans. It's a restaurant and niche retailer with a market cap just over $1 billion. This could be a nice income play. The yield is one percent lower than Darden, but it hiked it 25-percent in 2011.

Don't expect a similar move in 2012, but it's a safe assumption that the dividend will go up. Add in double-digit share appreciation, and there's some real value there.

Theme Parks:

As for theme parks, it's a tiny space relative to hotels and restaurants. There are basically only three major players in the space, and only one of them is truly dependent on the parks.

Disney has, well, DISNEY! And Comcastowns Universal Studios in the U.S., and licenses it overseas. For Comcast, it's a $2 billion business and it's smallest unit. Harry Potter in Florida and King Kong in California have been key revenue drivers, and the bottom line is theme parks are growing slowly, but they are adding to profits.

For Disney, it's about revenue and about extending the brand. Last quarter, profits at Disney parks was up 18-percent, which is strong. Disney proved more reliant on the park revenue last quarter, and it's clearly dependent on the economic recovery. The next challenge is the spring vacation season and whether fuel prices will weaken the trend.

Six Flags recently reported strong revenue but an EPS miss. Even though it's losing money on an earnings per share basis, the company has remained committed to a dividend.

Appliances:

Finally, appliances. These are so deeply enmeshed in larger economic stories. For instance, General Electric does a lot more than just sell microwaves, and Home Depot sells a lot more than just refrigerators.

The key here is that, perhaps, investors should look beyond the big box retailer and the manufacturer. One interesting play if you consider the recent housing strength, coupled with the recovery of the jobs market: Amazon .

As shoppers increasingly use stores as showrooms and then go home to hunt for bargains, Amazon stands to gain share. Whether that translates into increased profit and share gain remains to be seen. The stock has not done well relative to the broader market. Right now, it's up 4-percent year to date, while the S&P 500 is up almost 9-percent.

In the end, more people have jobs than they did a year ago. That means, they're more likely to spend money. That is a positive for all of these business segments; however, if oil and gas prices remain this high, the spending trends could reverse by summertime.

Disclosure: Comcast owns 51 percent of CNBC,. General Electric owns 49 percent of CNBC.

Follow Brian Shactman on Twitter: @bshactman

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