Bernanke’s acknowledgement of a future recession worries many on the street but it also provides the chance to get into several major deep discounters.  Deep discounters such as Big Lots and Family Dollar surge when economic news gets worse.  When people make less, they flee to these two stores for big savings on items.

Just as the housing bubble helped grow Target’s middle to upper class customer base, an ongoing recession will do much to line the pockets of Big Lots and Family Dollar which buy merchandise in bulk for dirt cheap to turn around and sell again for much lower than competitors.  These two companies are known for their low income customer base and benefit when the economy looks less than par.

Both these companies have a strong branding image and are known for their low prices.  Both stores offer brand name products with a much lower price than can be found at stores like Target or even WalMart.  The companies benefit by buying product that is overstocked and take in merchandise from other stores that might be out of season.   The loss of other retailers quickly becomes the gain of deep discounters.

I like deep discounters much more than regular dollar only stores because they have the ability to negotiate prices.  A dollar store that switches to a deep discounter usually faces tough marketability as consumers lose interest as prices rise.  Deep discounters are not as prone to losing money when the dollar falls, as the dollar loses value, the dollar only stores must cut the amount of their product or raise prices.

Big Lots reported very good earnings last quarter and set high marks for the next year.  The company has seen steadily increasing business as consumers look to cut costs by shopping at the deep discounter.  Biglots trades near its lows in share price at a tiny PE ratio of 14.  This kind of value is rarely seen even in deep discounters, especially with such high growth rates.  A PEG ratio of .7 is comforting that the company will continue to grow even amidst an economic downturn.

Family Dollar is another strong stock with much room to improve.  When the downturn of 01-02 came, Family Dollars stock moved up to the upper $40s to settle at record highs.  As you can see, this company proves to be very solid in periods of economic downturn and fluster as the market stabilizes.  Currently the stock trades at $21.40 per share, about the same price it traded before the internet bust.  This one trades even cheaper than  Big Lots at a PE ratio of 13 but has a much lower growth rate than Big Lots at a 1.26 growth rate.  Either way, if history repeats just like it did during the internet bust, this company is set to boom.

Beating the market in a downturn is much easier than in an upturn.  If the economy follows through with expectations, both companies can expect higher earnings and better than expected growth.  Both brands are known for their low prices on brand name products.