The Stock That Will Perform the Best as Consumer Spending Pulls Back

Stock That Will Perform the BestThe objective of Black Friday shopping for consumers this year was simple: find the best discounts in the retail sector. And while discounts seem to be everywhere, consumers are more focused on saving a dollar. There will surely be some sad retailers in the retail sector this holiday shopping season.

The retail sector will likely face some hard times that could get worse as we move through the final two weeks of the key shopping season prior to Christmas.

While the likes of Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Kohls Corporation (NYSE/KSS) struggled to attract shoppers, discounter Dollar General Corporation (NYSE/DG) reported a strong fiscal third quarter that supports why I favor the discounters in the retail sector. (Read “What the Changing of the Guard at Wal-Mart Means for the Stock.”)

Discount retailers like Dollar General will likely continue to perform well and attract customers, since the economy continues to appear fragile, especially in the jobs market. And even as the economic renewal picks up, I still sense the discount retail sector will continue to fare well.

In the case of Dollar General, the fiscal third quarter (ended November 1, 2013) showed net sales jumping 10.3% year-over-year to $4.38 billion, up from $3.96 billion in the year-earlier fiscal third quarter. The key same-store sales metric jumped 4.4% year-over-year.

The company reported adjusted earnings of $231 million, or $0.72 per diluted share, in the third quarter, up 10% from $210 million, or $0.63 per diluted share, in the comparative quarter.

And while Dollar General is up 21.4% over the past 52 weeks as of December 5, the company has been consistently buying back its shares, which I view as a positive insider signal. The company has bought back 27.1 million shares since December 2011, and it just announced another $1.0 billion in share buybacks.

At its current valuation of 15.7 times (X) its fiscal 2015 earnings per share (EPS) and a price-to-earnings growth (PEG) ratio of 1.14, the stock still has some upside left. Dollar General’s current 52-week high is $60.25.

The chart of Dollar General below shows a nice run-up since September 2012, in which the stock has doubled in price and appears to be heading higher if it can break out of its current sideways channel near $60.00.

DG Doller general corporation chart

Chart courtesy of

In addition to Dollar General in the discount retail sector, other discounters that I like include Dollar Tree, Inc. (NASDAQ/DLTR) and Family Dollar Stores, Inc. (NYSE/FDO), which is the smallest of these three discounters in the retail sector.