Monday’s consumer spending report was lower than expected, but it didn’t stop the market from continuing to snatch up shares of consumer discretionary stocks. That makes sense: employment gains are coming in strong; personal income is rising; and energy prices have yet to rally. It all adds up to a pretty picture for companies dependent on Americans spending on nonessential goods and services this year.

I advised in February that consumer discretionary stocks were starting to rally, presaging a market rebound. That turned out to be true, and the stocks I recommended then — Mohawk Industries (NYSE: MHK) and Disney (NYSE: DIS) — have both performed well since then. But some market observers think the more recent rally in consumer discretionary stocks is somehow a bad sign, indicating a market top. I disagree. While disappointing earnings could derail the market in the short run (and create bargains for high-quality companies’ shares), so far the earnings season has been better than expected. And investors’ continued faith in consumer discretionary shares is a solid indicator that the economy remains on the right track.

#-ad_banner-#I wouldn’t add to your holdings in Mohawk and Disney at this point, although both are certainly worthy of holding, and adding to on declines. Here are two more consumer discretionary stocks I have on my watch list now:

I recommended Brunswick Corp. (NYSE: BC) in March, and the stock is up more than 15% since then. One of the world’s leading manufacturers of recreation products, Brunswick specializes in marine and fitness equipment; it is also the #1 maker of billiards equipment. With global economies still weaker than ours, I like the fact that 80% of Brunswick’s revenue comes from the United States Recreational boating sales also should continue to benefit from low gasoline prices and the aging baby boomer population. And the firm’s fitness equipment sales will continue to get a boost from Americans’ increasing obsession with exercise.

Brunswick’s earnings are expected to grow 15% to 16% annualized over the next five years, generating solid free cash flow. Although Brunswick has enjoyed a good run, the stock remains reasonably priced at only 14.3 times analysts’ consensus estimate for 2016 earnings per share. Consider buying on dips below $48.

Dick’s Sporting Goods (NYSE: DKS) is another beneficiary of both the increasing demand for fitness gear and the aging of America. One of the world’s largest sporting goods retailers and the largest in the United States by revenue, the company operates 645 Dick’s stores in the United States, as well as more than 80 Golf Galaxy stores and a smattering of other retail brands (Field & Stream, True Runner and Chelsea Collective). Having grown from its roots in the mid-Atlantic, Dick’s now operates in 47 states.

Dick’s has focused on new store openings in underserved markets. The company sees the potential to grow rapidly until it has around 1,100 stores — roughly the number of stores operated by other big box retailers such as Kohl’s, Bed Bath & Beyond and Best Buy. The company also has invested in rapid growth of its online sales, which have posted 39% compound annualized growth over the past five years, vs. 20% for the industry as a whole. Dick’s has invested heavily in seamlessly integrating its online and in-store experiences and offers customers extra flexibility through features like “order online and pick up in store” buying and on-site search functionality on the mobile app. Online sales provide higher profit margins and allow Dick’s to sell beyond its geographic footprint; they also allow the company to compete head to head on price with online-only retailers like Amazon.

Dick’s has a unique opportunity to boost market share this year, as rival Sports Authority just announced that it is liquidating and closing all of its 460 stores in the United States. While the sale of Sports Authority’s inventory could hurt Dick’s profit margins in the next two quarters, the long-term benefit of increasing market share is more than worth the cost.

Dick’s has rallied since Sports Authority’s initial bankruptcy announcement in mid February, but the stock still trades at a reasonable 16.2 times analysts’ consensus estimate for fiscal 2016 earnings (ends January 2017) and well below its 52-week high of $56.94, which I consider a viable short-term target.

Risks To Consider: Consumer discretionary stocks are vulnerable to lower-than-expected U.S. economic growth and higher gasoline prices.
    
Action To Take: Buy Brunswick below $48 and Dick’s Sporting Goods below $50.

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