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Retailers stand to benefit greatly from falling gas prices. As the AAA report below shows, gas prices have fallen $0.30 from their peak. At this point in the cycle, it may not matter which retailer you buy as they could all rally strong with the sector. Some of our favorites are Chipotle Mexican Grill (NYSE:CMG), Dicks Sporting Goods (NYSE:DKS), Sears Holdings (NASDAQ:SHLD), Kona Grill (NASDAQ:KONA), and Jamba Juice (NASDAQ:JMBA).

U.S. retail gasoline prices edged down to $3.81 a gallon, on average, on Monday from $3.818 a day earlier, according to auto club AAA, the Oil Price Information Service and Wright Express. On July 17, the average hit a record $4.114.

That's a substantial drop in gas prices in less then a month. This should provide huge relief to consumers and allow for more spending at stores and restaurants. Most of the retailers that have recently reported results were hesitant to talk bullish because of the drop in gas prices. In most cases though, they hinted that results had improved since mid July.

Of the stocks mentioned above, CMG and DKS are by far best of breed retailers. Both have the regional to national plays that are so attractive in the retail space and both dominate the competition. CMG reported surprisingly strong 7% comps for Q2 but missed earnings and saw the stock price swoon. DKS on the other hand warned of lower earnings and forecast negative comps. Both have seen their respective stocks drop more then 50% from highs providing for a lot of upside movement as gas prices decline and the retail sector garners more attention. Look for these 2 stocks to move first in this retail rally.

SHLD will likely follow along as well since its a well known retailer. Our firm has invested in SHLD more for the commercial real estate play but it continues to trade as if the reason to own SHLD is for the retail exposure. Look for it to continue to bounce higher.

The remaining 2 plays, KONA and JMBA, are much more speculative. Both stocks have absolutely been crushed as they both recently reported substantially negative comps. The target market for these 2 companies is more the upper middle class which has been down shifting its spending so if anything these 2 will likely get the biggest bounces from lower gas prices.

KONA is a 20 chain restaurant that continues to expand at a rapid clip. Management eventually sees a 100 store operation, but they must improve on the -5.6% comps to continue expansion. Restaurant operating margins have constantly been in the 20% range until the recent softness in comps.

JMBA continues to be the troubled child of the group. They have a well established brand and strong customer loyalty yet they have been unable to consistently turn a profit. A heavy reliance on CA stores in the last couple of years has hidden strong store expansion and also undermined the CEOs plans to expand margins by keeping expenses flat while growing revenue. Unfortunately when comps decline 7% that plan doesn't work out and the CEO is forced to resign. Hopefully JMBA is able to find a dynamic CEO that can lead this strong brand to profitable growth.

Our recommendation is to initially focus on the stronger stocks like CMG, DKS, and even SHLD for the initial retail rally, but if gas prices fall further and the economy strengthens then look to buy KONA and JMBA for bigger gains. These 2 stand to benefit the most from a return of the US consumer.

Disclosure: Long SHLD, KONA and JMBA.

Source: Five Retailers for Falling Gas Prices