Cheap is the new black for retail
With consumers pulling back, it's not surprising that the retail stocks that have done well in 2008 are mostly discounters. But will this trend continue?
NEW YORK (CNNMoney.com) -- Americans may be descending on the malls today to hunt for bargains. But this is still expected to be a blue Christmas for many retailers and a gloomy end to what's turning out to be a dismal 2008.
Nonetheless, some consumer stocks are actually thriving this year. Not surprisingly, almost all of the retailers that are in the black through Black Friday are benefiting from the weak economy because they tend to focus on thrifty shoppers. (And who isn't trying to be more frugal these days?)
Shares of Wal-Mart Stores (WMT, Fortune 500) have gained nearly 20% so far this year. That makes it not just the best-performing stock in the Dow in 2008 -- it's the only one of the Dow 30 that's up this year.
The discount retailer is expected to post an 8% gain in sales and 10% increase in profits -- incredibly impressive in this economic environment.
Big Lots (BIG, Fortune 500), a closeout retailer of bargain-priced merchandise, is also doing well as consumers pull back. The stock is up 10% this year and earnings per share are expected to increase 35%.
But the companies that are really taking off this year are the ones that offer consumers the most bang for their buck -- literally. Shares of the dollar store discount chains have been among the best-performers in the market in 2008.
Are these stocks still worth buying though? That's less certain.
On the one hand, many are predicting that the economic malaise will linger into the early part of 2009. That means these companies are likely to rack up sales and profits increases that will outpace the rest of the retail industry.
Wal-Mart, for example, is expected to report an earnings per share increase of 8% in its next fiscal year. Analysts are forecasting a 10% jump in profits for Dollar Tree next year.
But investors are already anticipating this sluggishness to continue and have priced that into the stocks of many of these discounters. So several now actually trade at luxury-like valuations when compared to other retailers.
Wal-Mart, Family Dollar and Dollar Tree all trade at more than 16 times earnings estimates for this fiscal year, compared to an average price-to-earnings ratio of just below 13 for the retailing sector.
In addition, it's important to remember that investors often do a pretty good job of predicting economic recoveries well before they happen. Even though the next few quarters look bleak, there are growing hopes that the worst of this downturn will be over by late 2009.
If that's the case, money may start to move out of hot stocks like these discount retailers and back into other more hard-hit consumer stocks, as well as beaten down banks and tech companies, which could all do well once the economy improves.