Alan Greenspan believes there's a chance of recession, and other economists are pounding the table that after six years of expansion we might be due for a pullback.

I'm not convinced, but it's not a bad idea to look at the companies that comprise what I call The Poverty Index.

These companies cater primarily to lower-income customers and, for that reason, are likely to do well in a recession. Think pawnshops, check-cashing facilities and dollar stores.

Dollar General ( DG - Get Report), for instance, was just taken over by Kohlberg Kravis Roberts, a private equity investment firm run by buyout king Henry Kravis. This acquisition was the shovel in the ground that is going to set off a flurry of buyouts in this industry.

Not only was Kravis circling the wagon here, but great global macro fund Clarium Capital, run by PayPal founder Peter Thiel, was a shareholder as well. Clarium's strategy is to figure out the global trends over the next 50 years and then make the appropriate bets. After all, it's done well so far with its peak oil theories.

It seems Dollar General is not the only discount store in which Clarium's been making its bets. As of its last regulatory filing, the firm created a new position in Dollar Tree Stores ( DLTR - Get Report).

Let's take a look at the five-year chart of Dollar Tree below.

In the past three years, the stock price has created a pattern that looks almost like a smile. The popular thinking was that Dollar Tree and the other dollar stores would consistently pull market share from Wal-Mart ( WMT - Get Report). This, in fact, was happening. But then Wal-Mart started undercutting the dollar stores, and the situation reversed, hence the slowdown in the stock price.


Dollar Tree Stores (DLTR)

Dollar Tree's 2005 earnings before interest and taxes came in at $275.2 million, down from 2004's $288 million, which was flat with 2003. The trend, however, has reversed in 2006, with Dollar Tree's EBIT coming in at $302 million. Analysts also expect revenue to grow from $4.28 billion this year to $4.68 billion next year.

The balance sheet is pristine with $306 million of cash in the bank, $412 million in cash flows and only $268 million in debt. If I were a shareholder activist, I'd want to see the company lever up to about $1 billion and buy back one-third of the shares outstanding. And, if I were a Henry Kravis type, I'd probably want to take the company private and have all of those cash flows to myself. Trading at only 7.6 times cash flows, it's a very attractive buyout candidate, particularly with increasing cash flows.

I'm also excited about two other portfolios that own Dollar Tree. First off, another shareholder is the Ave Maria Catholic Values Fund, which seeks to invest in companies that do not violate the core values of the Catholic church. The fund returned 16% in 2005 and has an impressive five-year track record of 13.57%. Check out its top holdings on the Ave Maria Catholic Values Fund portfolio page on Stockpickr.

Dollar Tree also makes the list of Top Earnings Champions, companies with 10 straight years of increasing earnings. Others on the list include Apollo Group ( APOL) and Bed Bath & Beyond ( BBBY - Get Report).

For other stocks on the poverty index, including pawnshop company First Cash Financial Services ( FCFS - Get Report), check out Stockpickr's Poverty Index page.

Stockpickr tip of the day: Looking at recent mergers and acquisitions and then trying to find similar companies that could be acquisition targets can be a rewarding investing strategy. For instance, in the education space, Laureate Education ( LAUR) recently accepted a buyout offer.

Here's a list and analysis of the cheapest companies in the education space that might be suitable takeover targets.

Stockpickr also just recently updated our list of Top Merger Arbitrage Plays.

And, finally, on his Feb. 21 "Mad Money" show, Cramer offered his own Top 10 Merger Possibilities, including Gannett ( GCI) and Kroger ( KR).

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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