Here are the stocks UBS believes will benefit most from tax reform

Published Fri, Jan 26 20184:14 PM EST

Investors could see even more gains in 2018 thanks to underappreciated effects of tax reform, according to UBS analysts. "We believe changes to personal taxes will drive an increase in consumption, benefiting a variety of spending categories and demographic segments in the coming quarters," Michael Lasser, analyst at UBS, wrote to clients Thursday. "We see the largest consumption category growth in other lodging, entertainment fees and admissions, public and other transportation, owned dwellings, and alcoholic beverages." Lasser said most U.S. households will see an increase in disposable income of 2 percent to 4 percent within the year, adding up to at least $200 billion in additional cash for the nation's consumers. The analyst highlighted several stocks that tend to climb when consumer spending rises, complete with UBS's thesis on each company and corresponding price targets. Here are five buy-rated stocks highlighted by the UBS analysts in light of Republican tax cuts. 1) Home Depot ( HD ) "We see the Home Improvement retailers as beneficiaries. In particular, we see the benefit from a little extra money in consumers' pockets going towards categories that are already gaining share. Since 2012, the building materials category has gained 74 bps of wallet share. We suspect that the tax savings will allow more households to do home improvement projects or to do larger projects." "Building materials has been gaining wallet share for the last 5 years, which should be aided by greater disposable income." Lasser has a $212 price target on shares of Home Depot, representing 3 percent upside from Thursday's close. 2) Hilton ( HLT ) "As households start to see an increase in discretionary income as a result of the U.S. tax reform, we quantify percent of increase in leisure and lodging spend from marginal propensity to consume … Lodging shows highest incremental growth upside across 28 broad consumption categories, in our view, highlighting the broader consumer tendency to spend more on experiences vs. things. Analyst Robin Farley has an $86 price target on Hilton, implying 1 percent downside from Thursday's close. 3) Ford ( F ) "We estimate the personal tax savings will increase the new vehicle market by 1.3 percent and the used market by 0.8 percent … With the number of returning off-lease vehicles increasing again in 2018, used vehicle pricing is expected to fall, which will also add pressure to new vehicle pricing. Therefore, automakers will likely absorb this demand benefit through improved underlying pricing rather than increased volumes." Colin Langan, another UBS analyst, has a $15 price target on Ford. The target is 30 percent higher than Thursday's close. 4) Burger King ( QSR ) "Traditional QSRs are likely to exhibit outsized benefits from lower income consumers, particularly at restaurants that are currently demonstrating momentum and have positive guest count growth. We view McDonald's and Burger King (QSR) as best positioned to gain from the lower income consumer given the smaller average ticket size at QSRs ($3-$8) and the potential to attract an incremental purchase or add-on from current consumers in a still value-driven environment." Analyst Dennis Geiger has a $74 price target on Restaurant Brands International, representing 3 percent downside from Thursday's close. 5) Dollar Tree ( DLTR ) "We also think the Dollar Stores are poised to benefit. Notably, the marginal propensity to spend for the low end consumer is typically the highest. Thus, we believe that the additional income due to lower taxes will be spent at the retailers that they already frequent. This places Dollar General and Dollar Tree as prime beneficiaries given that 53 percent to 63 percent of their shoppers have incomes below $50,000, which is below most other retailers." Lasser has a $125 price target on Dollar Tree, which is 9 percent higher than Thursday's close.

Patrick T. Fallon | Bloomberg | Getty Images

Investors could see even more gains in 2018 thanks to underappreciated effects of tax reform, according to UBS analysts.

"We believe changes to personal taxes will drive an increase in consumption, benefiting a variety of spending categories and demographic segments in the coming quarters," Michael Lasser, analyst at UBS, wrote to clients Thursday. "We see the largest consumption category growth in other lodging, entertainment fees and admissions, public and other transportation, owned dwellings, and alcoholic beverages."

Lasser said most U.S. households will see an increase in disposable income of 2 percent to 4 percent within the year, adding up to at least $200 billion in additional cash for the nation's consumers.

The analyst highlighted several stocks that tend to climb when consumer spending rises, complete with UBS's thesis on each company and corresponding price targets.

Here are five buy-rated stocks highlighted by the UBS analysts in light of Republican tax cuts.