Start 2012 off right

More consumers are turning to discount variety stores, and the sector is benefiting.

Over the next five years, dollar and variety stores are expected to perform well by targeting low-income households and thrifty customers. Competition will challenge the industry, but consumers will rely on the stores for inexpensive discretionary purchases.

Stocks in the consumer staples sector continue to perform their traditional defensive role as the broader equitymarkets come under pressure in response to concerns over Europe’s sovereign debt crisis and a weak U.S. economy. That’s because most food, beverage and household products are considered essential to daily life.

The operators in the Discount Variety Store sector generally retail these consumer staples, plus a broad range of general merchandise such as apparel, automotive parts, dry goods, hardware, and home furnishings, with none of the lines predominating. Typically, industry operators retail such goods at discounted prices. The industry does not include department stores, warehouse clubs and grocery stores.

Thrifty consumers will provide continuing growth for discount stores, and SmarTrend has identified several stocks as being in an Uptrend. This sector has also gained popularity as a result of several private-equity deals. In October 2011, NDN (99 Cents Only Stores Inc.) agreed to be taken private in a deal valued at about $1.6 billion.

The company announced the private-equity firmAresManagement and the Canada Pension Plan Investment Board would be acquiring it for $22 per share in cash. SmarTrend identified an Uptrend in NDN stock on September 16, 2011 at $20.61.

Another major transaction in this sector occurred in 2007, when KKR & Co. (KKR) led a $6.9-billion leveraged buyout of Dollar General. They subsequently took the company public in 2009.

DG (Dollar General Corporation; see chart, this page) operates a chain of discount retail stores located primarily in the southern, southwestern, midwestern and eastern United States. The company offers a broad selection of merchandise, including consumable products such as food, paper and cleaning products, health and beauty products and pet supplies, and non-consumable products such as seasonal merchandise.

DG is in an Uptrend called by SmarTrend on August 30, 2011 at $35.37. With a price of $40.47 in mid-December 2011, this stock has increased more than 14% since the Uptrend alert was issued.

FRED (Fred’s, Inc.) operates discount general merchandise stores in the southeastern United States. The company also markets goods and services through Fred’s Super Dollar Stores and Pharmacies, and Fred’s Xpress Pharmacies. SmarTrend shows shares of FRED in an Uptrend and issued the alert on October 24, 2011 at $12.27. In mid-December, FRED was trading at $13.59, representing an increase of over 10%.

FDO (Family Dollar Stores, Inc.) is a discount store chain which operates stores throughout the United States that offer merchandise including consumables, home products, apparel and accessories, seasonal items and electronics. On September 1, 2011, SmarTrend issued an Uptrend for FDO shares at $52.72. Inmid-December, trading at $58.12, FDOshares also showed an increase of about 10%.

WMT (Wal-Mart Stores, Inc.), a well-known name in retailing, operates discount stores, supercentres, and neighbourhood markets, which offer merchandise such as apparel, housewares, small appliances, electronics and hardware. Walmart’s markets offer a full-line supermarket and a limited assortment of general merchandise.

The largest company in this sector by far, Walmart operates throughout the world. WMT is in an Uptrend called by SmarTrend on October 7, 2011 at $53.47. With a price of $58.27 in mid- December,WMT stock increased around 9%.

Although the outlook for the discount variety store industry is positive, we cannot overlook the continuing shadow of the poor economic outlook, high unemployment and negative consumer sentiment that are affecting many other sectors of the retail industry. As with all investing, and especially in these times of rapidly shifting market trends, use a system that will alert you when the winds of change are blowing strong.

Chip Brian is founder and CEO of SmarTrend®. If you wish to follow any of these stocks, and find out when their trend changes direction, try a 14-day free trial at www.mysmartrend.com.