Dollar stores' stocks defying the economic downturn

— -- Recession-wary shoppers aren't the only ones finding big bargains in the dollar stores.

Investors are, too.

The stock market might be suffering one of its most painful slumps ever, but shares of stores that sell the cheapest items are ringing up gargantuan gains.

Changing habits

The worse the economy, the better for retailers of deeply discounted items. Consumers getting used to pinching pennies and saving money are looking for ways to buy what they need for less. "People were conditioned to spend with credit cards and home-equity lines," says Joan Storms, analyst at Wedbush Morgan Securities. "It's not free-flow spending anymore."

•Sell things people always need. The shelves of most dollar stores are stuffed with products consumers buy in good times or bad. When gas prices jumped last year, the dollar stores made themselves more of a regular draw by boosting the amount of discounted food they sold. Industrywide, these stores added freezer cases and coolers so they could offer milk and frozen foods as consumers choked by higher gas prices looked to cut back and make fewer trips.