Don't Count These Discounters Out

By Investopedia Staff | June 05, 2012 AAA

With shares of upper-crust pocketbook company Coach (NYSE:COH) and high-end jeweler Tiffany (NYSE:TIF) both trading toward their respective 52-week highs, some might assume that an investment in discount retailers no longer makes good financial sense or that the space is second rate. But over the next few years, discount chains will probably prove to be the better investment.

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Pinching Pennies
It is true that some shoppers have started to indulge themselves a little. After cutting back on spending for a prolonged period of time, it is only natural and probably explains why many investors are excited about the prospects for high-end chains. But make no mistake, the masses will continue to pinch pennies due to uncertainty over job security and a weak housing market, in addition to the vast damage done to their portfolios. Housing plays a big role because home equity has been a major source of funds for shoppers in recent years.

SEE: 9 Ways To Go Bankrupt

Shopping Cheap
There are a number of companies that are likely to benefit from this ongoing trend. Dollar stores like Dollar Tree (Nasdaq:DLTR) and Dollar General Corp. (NYSE:DG) stand out as potential beneficiaries. However, the stock that appears the most logical in this space for the foreseeable future is Wal-Mart (NYSE:WMT).

The Arkansas based retailer has exceeded analyst EPS expectations in six of its the last eight quarters, and positive surprises may lie ahead as well - such as due to Main Street's concerns over escalating food and oil prices, and the desire of many to save and stretch their budget.

While recent news of Wal-Mart increasing its annual dividend by 21% is very encouraging news to investors, it could also very well draw a lot more attention to the stock, and maybe help it drive through the existing 52-week high, which is currently $66. Making a new high could cause additional investors, particularly momentum investors looking to hop on a stock that has been performing and moving higher, to become interested.

SEE: Momentum Trading With Discipline

Other Discounters Worth a Shop
Target (NYSE:TGT) has also been a favorite of Wall Street. The company carries many necessities as well as things for around the home and backyard for all members of the family at more than 1,750 stores. Its ability to market to and sell to budget conscious consumers around the nation is a very big positive - one that will enable it to outperform higher end chains.

Also, in 2011 Target announced it will be expanding into Canada by 2013, which can't be ignored and is likely to get the Minneapolis based chain some positive Wall Street attention.

Bottom Line
Shares of some of the popular higher-end chains may be doing well, but don't be fooled. Conservative consumers will continue to shop the aisles of discount chains in force this year and probably next year too. Wal-Mart should continue to dominate and bring customers into its vast array of locations. Its strong earnings prospects in combination with its deep pockets and ability to challenge competitors on prices of many items is a major plus.

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