Dollar General and Family Dollar Are Right for These Times

NEW YORK (TheStreet) -- Foreboding headlines in my inbox grabbed my attention leading to tales telling us that the fourth quarter will be challenging for both investors and consumers.

A typical example was this chilling title We're Heading for Recession, Says Sam Zell".

The CEO of Equity Group Investments said in an CNBC interview that there's a "...compounding lack of confidence in the future has kept American companies from investing in their businesses and is leading the country back into recession".

No matter how scary the headlines -- one even suggested that restaurants are suddenly empty after a robust summer -- there are plenty of reasons to believe that the unemployed, underemployed and cash-strapped American consumer will be heading for the stores with the lowest prices.

That should be good for a company that will report fourth quarter results Wednesday and is expected to exceed last year's results. Family Dollar Stores ( FDO) is no average bargain vendor.

The company offers its loyal customers an array of products including household chemicals, paper products, food products, health and beauty aids, hardware and automotive supplies.

They also carry pet food and supplies, textiles like blankets, sheets and towels. There's something for everybody, including housewares, giftware and home decor products.

They carry clothing for all ages, electronics, school supplies, toys and even prepaid cell phones and service plans. As of June 28, the company had about 7,200 stores in rural and urban settings across 45 states.

FDO is selling for a price-to-sales ratio of only 0.84, and they've made their shareholders happy with a 34% return on equity. They even pay a modest 84 cents per share dividend. Wednesday's earnings numbers and the details should show a continued steady amount of EPS growth. The company's third quarter showed a year-over-year growth rate of 12.1%. The chart below helps us see the story of how FDO's share price moved the same direction as their EPS growth. FDO Chart FDO data by YCharts

It's certainly not a perfect or even complete picture, so if you're thinking about becoming one of Family Dollar Stores' investors, you might want to see if enough other investors will "sell the news" before you start adding FDO shares to your stock portfolio.

Jim Cramer favorite Dollar General ( DG) also appears to be poised to have a very profitable holiday season.

In a recent press release this smart purveyor of just about everything shoppers are looking for (and has 10,203 stores in 40 states) referred to itself as a "one-stop-shop for the holidays."

"Getting a jump-start on the holidays is important to our customers, so we've filled our stores with seasonal items in October to help them prepare for decorating, giving and celebrating," said Todd Vasos, Dollar General's executive vice president, division president and chief merchandising officer.

"Customers can trust Dollar General for great value and selection now and throughout the holiday season," is a quote straight out of their latest press release.

As of Aug. 3, (their most recent earnings quarter), DG had amassed total cash of $137 million and had an enormous levered free cash flow (trailing 12 months) of more than $401 million. This is the result of great management and prescient building of the kind of stores that are hard to beat when it comes to variety and value.

Many investors wonder what they'll do with all that levered free cash. Perhaps they'll offer a dividend, or if they really want to goose the stock's price, they might include a special bonus payout for shareholders?

That's why it was no surprise that they grew their quarterly earnings last quarter by 47% year-over-year! This chart does an impressive job of showing why their share price has been on a tear for almost three years in a row.

DG Chart DG data by YCharts

If Dollar General has another blow-out quarter it wouldn't surprise this analyst to see their share price hit new 52-week highs before the end of 2012. Their forward price-to-earnings ratio is 15.43 and their current P/E is just above 19.

With the stock market looking like it's in a consolidation phase, investors may be wise to wait and see if DG shares correct below the $50 line, and maybe even test their 200-day moving average of around $48. Then load up your "shopping cart" and see if there isn't a 20% upside pop when this massive bull market resumes its Fed-juiced rally.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

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