Sometimes the smartest actions are the ones you don’t take. That old dictum seems relevant at a moment when the markets are a paradox: Each new high only makes many veteran investors more nervous that disaster looms. Between lofty valuations, slowdowns from Europe to China, conflict from Ukraine to Syria, the end of the Fed’s bond-buying binge, and more, there are many reasons for caution. That’s why this year we decided to recommend not only investments to make but also ones to avoid. Smart defense is always wise, and the good news is that even in these precarious times, there are still opportunities to be found.
DON’T BUY U.S. CONSUMER-STAPLES STOCKS
Investors have lately piled into American household names like Coca-Cola (KO), seeking their safety and hefty dividends. But after rising nearly 13% so far this year, the consumer-staples sector is one of the most expensive in the S&P 500, and money managers now say they see little value there—especially because staples tend to perform poorly when interest rates rise.
DO BUY FOREIGN GLOBAL CONSUMER COMPANIES
What’s the difference between an American company with lots of foreign sales, and a foreign company with lots of U.S. sales? More than you might imagine. Coke and other U.S.-based behemoths generate most of their sales abroad, but that’s a negative at the moment since those economies aren’t growing as fast as the American economy is. By contrast, several European consumer-oriented companies are heavily focused on the U.S. and may benefit more from its economic growth than the market has acknowledged. They’re often cheaper too: The MSCI Europe index has a price/earnings ratio of 15, compared with 17 for the S&P 500. “Now we’re buying European multinationals mostly for the global recovery, because they have been globalizers forever,” says John Stoltzfus, chief market strategist for Oppenheimer. He sees potential in shares of Nestlé (NSRGY), Unilever (UN), and Banco Santander (SAN) because of their attractive valuations. Jay Bowen, who manages $2.7 billion at his firm Bowen Hanes & Co., adds a second point: The declining value of the euro favors the continental enterprises. As he puts it, “They’re going to get quite a currency tailwind when they convert their earnings.” Bowen likes Nestlé’s prospects, as well as those of Novartis (NVS), the Swiss pharma colossus, which boasts a promising drug pipeline, gets a third of its sales in North America, and yields 2.9%.
DON’T BUY U.S. CONSUMER DISCRETIONARY/MID-TIER RETAIL
Consumer discretionary stocks such as retailers and carmakers tend to suffer when interest rates rise because financing costs can eat into household spending budgets. Barbara Miller, co-manager of the $5.6 billion Federated Kaufmann Fund, is underweighting consumer discretionary and especially retail stocks because lack of wage growth has made it hard to sell merchandise to middle-class shoppers.
DO BUY HIGH-END MULTINATIONAL CONSUMER DISCRETIONARY
Well-heeled consumers are less sensitive to interest rates, and they’ve remained largely impervious to the economic travails of recent years. “Over time we’ve looked for opportunities to invest in companies that can sell to the more flush consumer,” says Miller of the Federated Kaufmann Fund. For example, a second fund she runs maintains a position in Ralph Lauren (RL), which is increasingly penetrating global markets while also luring U.S. discount buyers to its outlet stores.
Stoltzfus, meanwhile, has taken a shine to Tiffany (TIF), “because people like to buy jewelry to celebrate when things go better.” Oakmark International Fund co-manager Rob Taylor is finding more value abroad in luxury-goods companies with blockbuster U.S. revenues, such as Richemont (CFRUY), which owns high-end labels like Cartier and Montblanc. Although the company is based in Switzerland, it has been posting double-digit sales growth from the U.S. Katrina Dudley, co-manager of the Franklin Mutual European Fund, is also shopping for consumer discretionary stocks in Europe. She’s bullish on French hotel company Accor (ACRFY), which “will benefit from rising consumer confidence,” she says.
DO BUY AIRLINES
Marty Sass of M.D. Sass, which oversees $7 billion, sees a play on both rising consumer spending as well as low fuel costs for American Airlines Group (AAL). The stock was hurt by concerns over a global economic slowdown and that Ebola would deter air travel. But American actually saw zero falloff in ticket sales, Sass says. Because the airline’s business is concentrated on the U.S., Sass thinks the stock will take off as the strengthening dollar encourages more jet-setting. And American’s decision not to hedge its fuel costs (unlike its rivals) could provide a near-term benefit from cheap petroleum. Dudley is a fan of International Airlines Group (ICAGY), which owns British Airways and Spain’s Iberia.
Read more from the Fortune 2015 Investor’s Guide “Don’t Buy This, Buy That” series:
This story is from the December 22, 2014 issue of Fortune.