6 Discount Retailer Stocks to Put in Your Shopping Cart

Worries of a weakening economy or rising rates may cause some investors to shy away from retail stocks. Discount retailers, however, are seen as recession resistant while consumers seek to stretch the value of their dollars. These leading advisors and MoneyShow.com contributors highlight some long-term opportunities among discount retailers. Todd Shaver, BullMarket Dollar Tree is a rare retail company that actually offers a defensive play in case of a recession, given that people tend to look for discounts more when budgets tighten. Of course, a booming economy drives consumer activity across the board, and since that's the world we live in, the outlook for Dollar Tree is strong either way. The status quo is our friend. If economic clouds gather, this is one of the bright spots. The stock has had a terrible year, but that's how it earned a place in our Special Opportunities portfolio in the first place. It hit $115 in January and now sits $30 below that. While it's been no secret that the 2015 acquisition of rival discount chain Family Dollar has been a drag on the Dollar Tree brand, management has recognized the issue and is actively working to address the problem. Operating trends at Family Dollar stores have improved and converting some to Dollar Tree outlets has helped. Still, revenue per store growth stands around 1.7% for the parent company while the new stores are tracking only 1.3% growth -- and the conversion process is expensive. Even so, margins are strong even on the weak side of the company. Family Dollar's pricing and low-frills concept has ensured that 8% out of every dollar spent in its stores makes it to the bottom line. Remodeling has increased short-term costs but paid off with an immediate pickup in sales. And the overall footprint keeps expanding. The number of stores in the primary Dollar Tree chain should grow with the economy to 10,000 over the next decade, which is good news because this is still the beating heart of the company. With 8,000 stores on the Family Dollar side, the future is bright. We're here for the turnaround and to hedge our overall universe in the event the economy takes a downswing. Perhaps that's why world-famous investor Carl Icahn took a stake in the company made public around Oct. 16. He's predicting a rebound for Family Dollar one way or another, and he should know, having been a longtime backer of that company prior to the acquisition. If Carl Icahn is predicting good things on the horizon, who are we to disagree? We bought the dip and feel a recovery should help the shares hit our $120 target. Chuck Carlson, DRIP Investor To be sure, the rising retail tide is not lifting all boats. Retailers dependent on mall traffic, for example, are still finding rough waters. And retailers that are caught in the middle -- neither high-end players nor discounters -- are struggling to resonate in the marketplace. Still, a number of retailers have been putting up good numbers, and their stock prices are benefiting from the top-line and bottom-line growth. Walmart is coming off its best quarterly showing in years. Same-store sales in the latest quarter rose 4.5%, the highest growth rate in more than 10 years. The stock's online business is growing nicely, and Walmart seems positioned to be able to weather the competitive threat from Amazon. The stock has advanced in recent weeks but is still down from its 52-week high of nearly $110 per share. Yielding 2%, these shares offer a blue-chip play in the retailing sector. Another retailer posting excellent results is Costco Wholesale . U.S. same-store sales for the 52-weeks ending Sept. 2 (excluding changes in gasoline prices) were up a healthy 7.4%. The company's e-commerce business was up 31.3% over the same time period. Costco's business model, with its membership fees, provides a nice kicker to profits. Down from its 52-week high of $245, Costco remains a solid holding in retail. Neil Macneale, 2-for-1 Stock Split Newsletter Our long-term strategy is to add one stock to our 24-stock portfolio each month, while eliminating our oldest holding. Each new stock that we add is chosen from among those companies that have announced stock splits. TJX Companies Inc. is a company we previously owned, from January, 2012 through July, 2014. Our overall return with this company at that time was 22% annualized and we'll hope for a repeat as we again add it to our model portfolio. The company is a discount clothing and home décor retailer operating over 4,000 stores in nine countries under the T.J. Maxx, Marshalls, HomeGoods and Sierra Trading Post brand names, among others. Valuation numbers -- price-to-earnings and price-to-book -- are higher than usual for our portfolio pick, but they seem to be justified at this time due to the accelerating growth in both sales and earnings. TJX Companies pays a 1.4% dividend and is significantly less volatile than the overall market. Returns and profitability numbers are consistently better than those of the competition. Looking down the road a year or two, this is one of the companies that may actually profit from the downturn in the economy that is surely coming. Meanwhile, I'm happy to have another defensive stock in the portfolio. Mike Cintolo, Cabot Top Ten Trader and Cabot Growth Investor Ollie's Bargain Outlet has one of the market's best cookie-cutter stories, which is probably why, despite a big advance in recent years, the stock is still holding up well in this environment. The company's motto is Good Stuff Cheap, and that basically explains the business -- the firm is a leading value retailer, offering goods of all sorts (housewares, food, bed and bath, floor coverings, electronics, toys and more) and creating a treasure hunt-type of atmosphere in its stores. As its scale has increased, so has its buying power, allowing Ollie's to get better deals, be it direct from vendors or for closeout merchandise. And that's created a ton of customer loyalty; its Ollie's Army customers has grown more than 25% annually for the past few years, which is vital as they spend 40% more than non-members. As for the growth potential, Ollie's operated 282 stores at the end of July (each one pays back the initial investment in about two years), but that's just scratching the surface -- it's westernmost store is in Louisiana, and management believes there's ultimately room for 950 locations. In the second quarter, the store count was up 13% from a year ago, while same-store sales rose 4.4% (usually it's a bit lower than that) and earnings boomed 48% (boosted by corporate tax cuts). The firm's outlook for many years of 20%-ish earnings growth with a non-economically sensitive business is keeping a lot of big investors (and us) interested. Five Below is rare merchandise for big investors, given its best-in-class store economics that enables rapid (20%-ish increase in the store count each year) store expansion, with a big runway of growth (2,500 locations should be up and running eventually, up from 692 at the end of July). For hundreds of funds to take good-sized positions in a stock that isn't a mega-cap, they need to see great growth, the potential for further growth and (importantly) some surety that the growth story will play out -- all of which Five Below possesses. And, of course, the business itself isn't economically sensitive (everything is $5 or less and tends to be high-use stuff), which adds predictability (same-store sales have lifted every year for more than a decade). That doesn't mean there are no potential potholes. Every retailer needs to stay on the right side of fashion and gadget trends (which Five Below has) and the U.S.-China trade war might raise costs, though management said the current list of products on the tariff list shouldn't impact its results next year. As for the stock, it's come down with the rest of the market, but the decline looks normal to this point given its overall advance. We don't expect anything great before the market turns around, but if you have a lot of cash and want to put some of it to work while stocks are down, we're OK starting a small position in Five Below here.

6 Discount Retailer Stocks to Put in Your Shopping Cart

These long-term opportunities are seen as recession resistant while consumers seek to stretch the value of their dollars.

Columnist Conversation

Implied Volatility on Crude Exploding

Ulcer Index

The Market Doesn't Believe Musk

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.