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Why Shares of Discount Retailers Were Up Today

What happened

Shares of discount retailers got a boost Monday after weekend headlines that at least offer a glimmer of hope that the U.S. could be turning a corner in its fight against COVID-19. We're still far from a solution to the pandemic, and it seems likely the U.S. economy will end up in a recession even after the virus is contained, but discounters are likely to hold up better than most when the shelter-in-place restrictions do come to an end.

Shares of Five Below (NASDAQ: FIVE) and The TJX Companies (NYSE: TJX) each closed up more than 12% on Monday, while shares of Dollar Tree (NASDAQ: DLTR) were up 8% and Dollar General (NYSE: DG) closed up 4.5%.

So what

Retailers, including discounters, have been hit hard by the pandemic response, which has limited consumer traffic in their stores and has caused households to cut spending. But these businesses, and in particular the dollar stores, are textbook defensive stocks for a recession, and if the U.S. economy comes out of the pandemic wounded, as expected, these businesses should be able to do well in the quarters that follow.

Image source: Getty Images.

The question is: When will the U.S. come out of the pandemic? It is still too soon to say, but U.S. markets rallied on Monday in part on headlines from the weekend that suggest new cases might have peaked in key U.S. hot spots. It will take time for that data to be confirmed and to establish a trend, but investors at least had a reason to hope that we could soon be entering a period of recovery.

These companies could get an added boost due to the damage done to higher-end retailers. The lack of spring buying is likely to cause many retailers to cancel orders. Those items are likely to make it to the shelves of TJX stores (like T.J. Maxx, Marshalls, and HomeGoods) and other discount merchants.

Now what

It's unwise to try to call a bottom, and it is even crazier to say with any confidence you are certain a pandemic is beginning to ease. Expect more volatility, and market down days, in the weeks to follow as investors react to the latest headlines.

But for those who can stand the volatility and expect the economy to take some time to recover even after the shelter-in-place orders are lifted, these discount retailers are not a bad place to look to invest. If history is a guide, the discounters will bounce back well before premium brands, and investors who get in early can benefit from the recovery.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and The TJX Companies and recommends the following options: long January 2022 $115 calls on Five Below and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.


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