Family Dollar to Gain as Shoppers Seek Sales

Family Dollar and other small discount chains stand to benefit as worried consumers hold back on spending.
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CHARLOTTE, N.C. (TheStreet) -- Family Dollar Stores (FDO) was a lucrative stock in 2008 when the recession dawned and investors flooded into discount retailers. It returned 30% that year as the S&P 500 Index plummeted 41%. In 2009, Family Dollar advanced just 9%, underperforming U.S. benchmarks as investors purchased riskier names.

Recently, the bargain merchandiser has received attention from top hedge funds, perhaps foreshadowing the return of performance.

During the first quarter,

Paulson & Co.

, run by John Paulson, and

Maverick Capital

, led by Lee Ainslie, made sizable investments in Family Dollar. Paulson, whose position is new, purchased six million shares of common stock, totaling 4.4% of the float. His fund now ranks as the eighth-largest shareholder. Ainslie enlarged his stake by 88% to 9.5 million shares, or 7% of the float. Maverick is the second-largest investor.

Typically, discounters succeed during recessions when unemployment rises and consumers cut costs. In recoveries, such companies fare worse because consumers regain confidence and become cavalier about spending. But numerous economists say this recovery is different. The unemployment rate has fallen from its peak of 10.4%, but only to 9.5%, a historically elevated level. As a result, consumers are still being mindful about their money.

The proof is in Family Dollar's quarterly results. Its first-quarter profit advanced 33% to $112 million, or 81 cents a share, as revenue grew 4.9%. The operating margin widened from 6.7% to 8.7% on improved pricing. Family Dollar strengthened its balance sheet during the recession. Its cash balance soared 71% to $511 million as debt stagnated at $250 million. Its $261 million net liquidity position signals fiscal prudence.

Of analysts covering its stock, 12 rate it "buy", 13 rate it "hold" and two rate it "sell."

Deutsche Bank

(DB) - Get Report

expects Family Dollar shares to advance 17% to $48, the loftiest price target.

JPMorgan Chase

(JPM) - Get Report

says the stock could rise to $47.

Raymond James

(RJF) - Get Report

and

Credit Suisse

(CS) - Get Report

predict the shares will touch $45.

Analysts are more optimistic about competitor

Dollar Tree

(DLTR) - Get Report

. Of those covering its stock, 13 recommend buying and nine suggest holding it. None rate it "sell." Of note, hedge fund

Blue Ridge Capital

, run by John Griffin, is Dollar Tree's fifth-largest shareholder, controlling 3.1% of the float. Its position was unchanged in the first quarter.

Griffin and Ainslie are proteges of Julian Robertson, former manager of

Tiger Capital Management

. They are as closely watched as John Paulson, who netted billions in 2007 by shorting the subprime mortgage market. Considering all three still see value in discount retailers, it would be wise to investigate the industry further. Other discounters worthy of attention are

Fred's

(FRED)

and

99 Cents Only Stores

(NDN)

.

-- Reported by Jake Lynch in Boston.