A Reality Portfolio Built on Two Retailers

Let's face it, times are tough. The headlines speak of an economy that is growing at an annual rate of 2.8%, but the numbers can be deceiving. For a perfectly understandable, in-depth look inside Friday's gross domestic product report, don't miss Digging Into GDP Weakness by Gene Balas in Real Money. The Federal Reserve's preferred measure of inflation, the personal consumption expenditure index, reached its lowest point in more than a year in the fourth quarter of 2011, but try telling consumers that there is no inflation. According to the Chicago Sun-Times, health insurance premiums rose 12% and gasoline prices climbed 27% in the Chicago area last year. Food prices in Chicagoland climbed 4.3%, while income was higher by only 1.5%. One could base investment decisions on the growth-without-inflation scenario portrayed by the headline numbers, but perhaps a more realistic approach would be beneficial. Given the current state of affairs, it should come as no surprise that select companies well positioned to service the squeezed American consumer continue to enjoy a stellar performance. In Dec. 9's A Realistic Play for These Tough Times, I wrote about three stocks that should benefit from the ongoing middle class squeeze: Public Storage (PSA), Extra Space Storage (EXR) and Dollar General (DG). Dollar General reached its all-time closing high on Wednesday, while PSA and EXR did the same on Friday. Since Dec. 9, EXR is up 8.4%, PSA has gained 5.6% and DG is higher by 4%. In addition to these winners, what other companies stand to benefit from the continuing decline in real income? Consider the stock of retailer Big Lots (BIG), which sells an eclectic variety of closeout merchandise, often from liquidated inventories, at a steep discount to typical discount retailers. In addition to selling to consumers through 1400 stores in 48 states, Big Lots also sells discounted merchandise to other wholesalers, distributors and retailers. BIG Source: TradeStation View Chart » BIG has formed an ascending triangle, but within that bullish formation lies a bearish double top pattern. My interpretation is that BIG will move higher, but not until after pulling back to support. I like the $38 area for an entry, which is the current location of both the ascending trendline and the stock's 50-day moving average (blue line). Last week's activity showed the stock rising on above-average volume, and then pulling back on lighter-than-normal volume -- a bullish development that indicates buyers could be more aggressive than sellers. Another company that offers discount general merchandise is Fred's (FRED). Operating primarily in the southeastern U.S., Fred's caters to middle-class American families with low-priced and off-label discount consumer products. Shares of FRED are in a steep bullish channel that began in October 2011. Since the beginning of that month, FRED has climbed an astonishing 44.21%. FRED's 50-day moving average is sloping sharply upward, after having crossed above its 200-day moving average on Dec. 27. This stock closed at a three-year high on Friday, and shows no signs of slowing down. FRED Source: TradeStation View Chart » Certainly, we all hope that prosperity is just around the corner, and there will come a time when this economic downturn, like all others before it, will become a distant memory. But until then, stocks like BIG and FRED should continue to do well.

A Reality Portfolio Built on Two Retailers

BIG and FRED show bullish technical developments and should continue to do well in a down economy.

Columnist Conversation

Watch Bob Lang and Doug Kass Discuss Short-Selling!

This Weekend on Real Money

Where Does the Nasdaq Go From Here?

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.