Going beyond Wal-Mart and Target

Looking to beat the market? Consider the second-tier names.

By Jamie Dlugosch May 18, 2010 4:41PM

Investors in the market like to focus on the big corporate battles. Take two giants in an industry and watch them go toe-to-toe in a battle royal.


To the winner go the profits, but how do investors do following the leaders? From my experience investing in giants is similar to owning an index fund. The returns are simply mediocre.


Below the radar in any industry are interesting sub-plots and possible investment opportunities that can outperform the market.


The discount retail space is no different.

We are all aware of the classic battle of the titans taking place between Wal-Mart (WMT) and Target (TGT), but what are the names of the smaller players that have the potential to grow quicker and possibly even usurp the power of the giants?


Wal-Mart and Target are fighting tooth and nail for the hearts and minds of the consumer. In the fight to stay at the top both companies seem to be struggling with growing from current levels.


Wal-Mart’s low price strategy may be winning the battle, but will it win the war and pay off for investors? The company reported earnings today that beat Wall Street estimates sending its shares higher.


In the same report, though Wal-Mart noted that the consumer was still having difficulties and that its forecast was a bit lower than expectations.


Target has been rapidly scrambling to adjust its trendy high end products at low price strategy in favor for discounts with grocery being the main driver for future growth.


High market valuations for both leave little room for error.


As an alternative upstart PriceSmart (PSMT), with approximately 30 locations in Latin America and the Caribbean, has the opportunity to grow significantly. Trading for 17 times trailing earnings and 14 times forward earnings leaves room for the stock to appreciate.


And who needs a brick and mortar business? Overstock (OSTK) offers discount goods over the internet. With competitive pricing and on-line sales increasing exponentially OSTK has the potential to grow far beyond its current $550 million market capitalization.


Finally there is BJ's Wholesale (BJ). No longer an upstart BJ and its $2 billion market cap is in position to make a serious run at both Target and Wal-Mart. Its valuation is more compelling as well.


BJ trades for just 15 times trailing earnings and 13 times forward earnings.


Watching Wal-Mart and Target slug it out at the top may be interesting, but it may not be as profitable. Consider these other names instead.


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