Stretch Your Pennies with this Stock

There is no doubt that consumers hurt by the recession want to stretch their dollars. And when it comes to investing in small-cap companies, being a frugal shopper is even more important.

That's because it's possible to pay too much for even the best growth stock. In order to make the most of your investment, you need to buy at bargain basement prices.

Finding surplus value is what shopping is all about - regardless of whether you're shopping for shoes, stocks, or really anything imaginable.

No doubt, we're all tired of the recession, and of hearing about how consumers are staying away from stores - and how investors are sitting on the sidelines. But the fact is: it‘s a truly great time to be a small cap investor and there are plenty of bargains out there. My subscribers are sitting on nice gains as we speak.

So it should be welcome news that retailers are cautiously optimistic that this holiday shopping season will turn out better than the last two. Recent monthly sales reports show that consumers are spending again, even if just a little bit more.

Chains including Target Stores (NYSE: TGT) and Kohl's KSS, along with big-box retailers like Best Buy BBY, had a good October, and appear to be readying big bargains to lure customers for the Black Friday maelstrom.

In past economic downturns, cash-strapped families have turned to Wal-Mart Stores Inc. WMT, but the severity of this recession has many shopping the deep, deep discounters, better known as dollar stores.

It seems logical to me that we should heed this trend, and look for value plays in the dollar store space to see if we can't make a little money this holiday season.

***A number of chains, promising everything under $1, sprung up after World War II to replace that American retailing mainstay known as the five-and-dime. While most dollar stores sell a lot of items for more than $1, California-based 99 Cents Only Stores NDN has held the line. I like it when a store has a simple mission, and sticks by it.

For small cap investors this stock is a tempting value play (even though we'll have to pay $16 instead of just 99 cents).

Unlike many competitors, 99 Cents Only Stores offers many name-brand products and top-quality fresh foods, including gourmet items. It is a 28-year-old chain and has concentrated on the California and Southwest markets.

Logic would suggest that dollar stores' sales might drop off as the economy improves and consumers have more expendable income. But I believe that with such a slow-moving recovery 99 Cents Only will still have sufficient demand to increase sales.

The chain recently reported second quarter results. Revenue rose 2.7 percent to $323 million, compared with $315 million a year ago. Net income increased to $12.9 million, or 18 cents per diluted share, from $9.6 million, or 14 cents a diluted share last year.

These results bear out what we're seeing across the board - companies have cut costs and built new efficiencies into operations. You can tell because profits are growing faster than sales.

Same-store sales did rise just 0.6 percent, versus 2.7 percent in the previous quarter, which is a bit troubling. But the September quarter is typically slow, and management had said previously that they were expecting a slow three months so at this point I'm not going to make too much of the slight drop.

***The consensus estimate for the dozen analysts following the company is for 10.4 percent earnings growth and 5.3 percent revenue growth next year. The consensus 12-month price target is $18.50, implying 12.5 percent upside from the current price.

That's enough to make this stock attractive right now, especially given that retail stocks could get a nice bump going into their strongest quarter.

In fact, I'm following a number of undervalued small cap stocks right now, and my Small Cap Investor PRO portfolio includes a specialty apparel maker with a retail presence, Joe's Jeans. This stock is selling at a deep discount right now, and I'd like to invite you to click here and find out why I believe Joe's Jeans is one of the top five small cap stocks priced at under $10.

Follow the link above and at the bottom of the page you'll be invited to sign up for a free trial subscription. My last six recommendations are all posting healthy returns, and two are up more than 50 percent in less than six months.