Retail stocks: Look for discounters and dollar stores

Q: Do you think shares of retailers that focus on discounted and overstock items will fare best in this economy?

A: When consumers are fearful for their jobs, portfolios and retirement, they're understandably not in a spending mood.

Terrible consumer sentiment and retail sales are painfully apparent at this point. Retail sales fell 2.8% in October to a seasonally adjusted $363.7 billion. That was the biggest fall since the data have been collected, beginning in 1992.

But while consumers might not be buying $300 jeans, fancy cars and other high-end items, they must still buy necessities. And while some consumers may have insisted on being pampered at full-service retailers a year ago, now many are willing to downscale a bit to save money.

These are all reasons why shares of discount retailers are holding up better than others. Wal-Mart wmt, for instance, was the only stock in the Dow Jones industrial average to be up for the year as of mid-November, and it's still in positive territory, by a big margin.

Deep-discounting dollar stores are doing even better. Shares of Dollar Tree (DLTR), 99 Cents Only Stores (NDN) and Family Dollar (FDO) are up 57%, 48% and 32% respectively this year. Those are especially dramatic returns if you consider the Standard & Poor's 500 index is down 40.5% during the same period. You can read why the stocks are faring so well here. .

If the economy continues to struggle, it's likely the dollar stores will continue to see strong traffic. Most have added broad offerings of food to try to make it a stop on the way home. And if the economy mends slightly, and consumers have more discretionary income, they may choose to buy less essential items such as toys or apparel.

While pricey stores and cars were the rage before the financial crisis, being frugal is in now. That puts the dollar stores in the sweet spot for now.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.

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