It turns out that so-called dollar stores -- which are known for luring customers through steep product discounts -- could be also the best place to hunt for bargains in the stock market, say analysts.
Research firm BTIG named Dollar General (DG) and Dollar Tree (DLTR) among its top picks for 2016, as analysts believe that the shares may be significantly undervalued. Many investors are overlooking the long-term ability of those firms to persevere even in economic downturns, BTIG analysts wrote in a Wednesday report.
According to BTIG, Dollar General and Dollar Tree shares are likely to be worth as much as $105 and $104, respectively, over the next 12 months, which is 15% and 14% above midday trading levels Thursday.
Dollar General, the larger of the two companies by market cap, is coming off its 26th consecutive year of same-store sales growth, "a feat unmatched to our knowledge," the analyst team noted, highlighting that the Goodlettsville, Tenn.-based company's growth has been remarkably undeterred by the 2008 financial crisis and cyclical pressures on U.S. retailers.
And Real Money's Jim Cramer agrees that these bargain chains could offer sustainable growth opportunities for shareholders, particularly because the U.S. economy, through a combination of rising rents and stagnant wages, is prompting many families to seek out the discounts these stores offer.
"In that environment, many individuals resort to the 'bargains' that are Dollar Tree and Dollar General. It is true that the prices are lower," he said in a recent Real Money report.
"Some of that is because of private label. Some of it is because of bargains these companies can exact even from brand-name manufacturers because of scale," he added. "Mostly it's because you have something left in your wallet after you go there. I just wish the Wall Street snobs would visit these stores so they would know how much better they are than they used to be."
Shares of Dollar General, which now operates more than 12,500 discount retail outlets in 43 states are up 21% over the past 12 months, and 163% over the past five years.
And Dollar Tree now operates nearly 14,000 outlets after last July's purchase of Family Dollar Stores, an $8.5 billion deal that helped pull in about 8,200 stores into the Dollar Tree franchise.
BTIG analysts, which maintain Buy ratings on both companies, said the Family Dollar acquisition was a "diamond in the rough," and is likely to drive "many years" of 20% earnings-per-share growth for Dollar Tree.
"While there is significant work ahead in the integration, we believe Dollar Tree will emerge as a more diversified retailer with complementary businesses serving a wider consumer demographic, with ample growth opportunities in both formats," the analysts said.
BTIG's other top stock picks include AutoZone (AZO), O'Reilly Auto (ORLY), Home Depot (HD) and Lowe's (LOW).