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Big Lots (BIG) has fallen out of bed twice so far this year, both times because of bad earnings. Before April it was the leading investment among the deep discounters. Now it is down nearly 20% for the year.

Our Robert Broens believes this makes BIG a bargain. I disagree, if for no other reason than stocks that fall out with the markets this year take a long time to recover from the fall. Money put into BIG right now is a bet on Christmas, and Christmas is months away.

There are three other deep discounters you commonly find on the highway. Fred's (FRED) often follows in the wake of a WalMart (WMT) move, taking the old store and offering many of the same items. Dollar General (DG) tends to move into neighborhoods other retailers have abandoned.

My favorite by far of the group is Family Dollar (FDO). It is not the biggest mover of the group so far this year - DG is up nearly 19% while FDO is up just 7.4%.

But I like FDO for two reasons:

  • It seems to have a deep management bench with veterans of such mass market leaders as Target (TGT) in position of authority.

  • It has been seeking out higher-income locations, in contrast to its rivals.

I believe that the current decade will be marked, pretty consistently, by a search for bargains. There is bifurcation going on, between the upper class that likes a Nordstroms (JWN) and a middle-class, even an upper middle-class, that is now pinching pennies, either just to get by or to get ahead.

I am fortunate to have relatives who are well-off, yet they love thrift stores and bargain basements. Even if people have money to spend today, they tend to be more jazzed by saving than spending, which in general is good.

I live near a rapidly-gentrifying town called Decatur, GA. When I moved here, in the 1980s, it was a very poor area. Now it is becoming a very wealthy area, the equal in many ways of Dunwoody or Buckhead, albeit skewing younger.

And we just got a Family Dollar. It's clean, it's open late, and everything in it is a bargain. Since it opened I have been surprised to see a steady stream of customers walking in from the neighborhood, even though I know those people can afford to drive elsewhere.

So I don't think FDO is going to zoom up in price. But I do think it is going to have a nice run, a multi-year run, one you can invest in rather than just trade. It sports a PE of 17.5, which is just a bit north of WalMart and Target, but among the deep discounters it seems to have the best long-term prospects. If you see a general market fall, especially if Friday's Fed meeting disappoints, take advantage of the weakness to give FDO a try.

Please, let me know if you disagree.

Source: Which Deep Discounter Has It Right Now?