Bet on the Dollar Stores in 2013

Even though commodities have backed well off the highs they hit last year, 2013 is shaping up as an expensive year for consumers, and that means investors need to look at those places that will prosper in a high-cost environment. Generally speaking, that's going to mean the dollar stores.

Congress has proved itself incapable of getting its financial house in order. The country has been operating for four years now without a budget, so we have an ongoing debate on raising the debt ceiling. With spending cuts seemingly off the table, that can only mean higher taxes are in our future.

A penny for your thoughts
Dollar stores such as Family Dollar (NYSE: FDO  ) and Dollar General (NYSE: DG  ) typically do better in depressed economies because consumers try to stretch their wallets further. Although everyday low prices at discounters like Wal-Mart and Target would suggest they would also prosper, as the last recession showed, even they're hurt when people have less to spend. It's not so much that traffic declines but rather that the value of a basket of goods is reduced simply because there's less money to go around.

Which is why Dollar Tree (NASDAQ: DLTR  ) and Big Lots (NYSE: BIG  ) should be beneficiaries, because they'll see increases in traffic and perhaps average basket size, since a dollar goes further there. In particular, those that sell consumables, like Dollar Tree and Family Dollar, should do even better than those who don't offer such options.

A taxing decision
While we averted the so-called fiscal cliff, it's not just the rich who will be paying more, as everyone up and down the pay scale will see their taxes rise. The Social Security payroll tax is going up to 6.2% again from 4.2%, meaning someone earning $50,000 a year will pay $1,000 more in taxes, reducing household income by $125 billion this year.

According to the Tax Policy Center, the fiscal cliff deal will raise taxes on the lowest 20% of wage earners by 1.1% while the next lowest 20%, the middle-income earners, will see theirs go up 1.3%. Overall, we'll all see our taxes rise 2.3% because of the deal the president and Congress struck.

Feeling better already
Then we have the higher taxes that will go into effect because of Obamacare. Since the law was front-loaded, that means we pay first before we get any of the benefits. In the meantime, health care costs have gone up about $2,400 for the average family with employer-provided insurance between 2009 and 2012. 

Now with the start of the new year, there are new taxes coming. There will be higher taxes on medical-device makers such as Boston Scientific and MAKO Surgical; flexible spending accounts used by some 30 million Americans will have limits placed on their deductions; and there will be new higher limits on medical expenses. Two tax increases targeted at those earning $200,000 or more will raise taxes on investment income and Medicare taxes. Hundreds of billions of dollars in new revenue over the next decade will be raised to pay for this reform.

Come a cropper
In addition to taxes, food prices are expected to go up, too. Last year's drought cut the U.S. corn crop by a quarter, according to the Agriculture Department, with the prospects high for a repeat performance this year. Some 60% of the U.S. is still experiencing drought conditions, and unless we have record snowfalls or torrential spring rains, the 2013 corn crop could wilt again. With government subsidies for ethanol easing out acreage available for food, prices are set to rise, though whether they hit the record prices they did last year, above $7 a bushel, remains to be seen. 

Add in high fuel costs -- oil trades just under $100 a barrel still -- and we've got a vise catching consumers in a very tight grip.

Through a combination of higher costs, higher taxes, and lower discretionary cash, pressure on consumers will exacerbate an already weak economy. In such an environment, businesses that help stretch wallets will be the winners, and for me, I'd say betting your bottom dollar on the dollar stores will be the most profitable play.

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