Rich man, poor man stocks

The trends I've outlined here have shaped retail stock performance as well.

A recent study by the management consulting company Accenture found that in the three years leading up to September, high-end and low-end retailers rewarded shareholders with total returns (stock gains plus dividends) of 80% to 90%, compared with 5% declines for retailers in the middle.

The big-picture economic trends should continue to bring more of the same. "It's impossible to believe that the American standard of living in the future can ever be what it has been," says Davidowitz. "We all have to pay higher taxes, and we all have to have less government services, and that means living standards can never be the same. If living standards can never be the same, stores like Family Dollar, and Dollar General have a very bright future."

Plus these low-end stores have done a great job of holding on to middle-income customers who have been trading down, says Cohen. They're doing this by remodeling, stocking a broader array of merchandise and offering smaller package sizes that let even budget-constrained consumers feel like they're on a shopping spree, he says.

They're also doing a good job of managing costs despite rising commodity prices, and expanding into food, which brings more customers into their stores, says Keri Spanbauer who follows retailers for Thrivent Asset Management. And all three of the dollar stores are launching new stores at a rapid pace.

These trends are all bullish, but a word of caution for new investors. Unlike the stuff they sell, the dollar-store stocks aren't cheap, and that makes them more vulnerable to risks. "I do like the dollar formats, but you have to be a little careful with valuation," says David Abella, who manages the Rochdale Dividend & Income (RIMHX) fund, which has outperformed competing funds and the S&P 500 nicely over the past five years. "The low-end retailers are pretty fully priced right now," agrees Thomas Vandeventer, portfolio manager of the Tocqueville Opportunity (TOPPX) fund, which also has outperformed during the past five years.

A big risk: increasing competition in the space, especially as Wal-Mart gets back in the extreme bargain game with smaller-format stores, says Deutsche Bank analyst Charles Grom, who has a "hold" rating on Family Dollar Stores for this reason.

The high-end retailers should keep doing well as income disparities continue to widen, but caution is in order for them as well, because these stocks look pricey, too. Nordstrom, though, stands out as perhaps the best potential buy in the space, with a four-star rating at Morningstar. (The highest possible is five stars; Saks and Coach get three.)

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Like bargain shoppers, Morningstar pays close attention to value with stocks, and it doesn't have a problem with where Nordstrom is trading.

Companies mentioned in this article include:  Nordstrom (JWN), Saks (SKS) and Coach (COH).

At the time of publication, Michael Brush did not own or control shares of any stock or fund mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.