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3 Discount Retail Stocks Rocketing Higher After Economic Stimulus Plans Announced

By Jason Hall - Updated Mar 17, 2020 at 4:27PM

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Three retailers that focus on low-cost consumer goods could benefit from the government's plans to help prop up the economy during the COVID-19 pandemic.

What happened

Shares of Dollar General (DG 1.76%)Dollar Tree (DLTR 1.09%), and Five Below (FIVE 4.75%) shot up more than 12% today following a press conference in which the Trump administration announced substantial economic stimulus. This was especially welcome news for the retail industry, which is expected to be one of the hardest hit, behind hospitality and airlines.

So what

Probably the biggest piece of the potential stimulus that has investors more excited about the prospects for these discount retailers is a proposal by lawmakers to provide American families with a cash payment of $1,000. This stimulus would be particularly welcome for people working the service-industry jobs that are highly exposed to closure due to efforts to contain the spread of COVID-19.

The administration is also reportedly continuing a push to cut the payroll tax that funds Social Security, but lawmakers' appetite for another tax cut -- particularly one that would be unlikely to really help those most at risk from the economic impact of coronavirus -- is said to be almost nonexistent.

Man in suit turning line from chart that's falling back up.

These discount retail stocks are regaining some of their losses. Image source: Getty Images.

The biggest risk to the economy at this stage seems to be the number of people who are going to lose their jobs, or at the very least see their pay cut substantially as their employers close their doors in the weeks -- and potentially months -- to come. Federal and state governments are taking steps to help support the businesses during this period, but today's announcement is a major effort to go further and provide financial support for the individuals affected.

That's viewed as good news for discount retailers that are popular with middle- and lower-income families. 

Now what

Despite today's big pop, all three stocks are still down from their 2020 highs, with Dollar General down a modest 7.4%, versus an almost 19% drop for Dollar Tree and a nearly 50% decline for Five Below.

The varying level of their sell-offs does make some sense, as Dollar General sells more food and consumer staples like diapers and cleaning products than the other two, while Dollar Tree's Family Dollar stores feature many of the same products. People will need these products no matter how bad things get in the weeks and months ahead, and Dollar General especially is well-located in many communities to be a key source of staple goods. 

Five Below, on the other hand, sells mainly discretionary consumer products, like toys, candy, and beauty products. As more people lose work from business closures and "shelter in place" orders, it's certainly the one that's going to be least relevant of the three. But people still need to be entertained, and a low-cost seller of these goods like Five Below could suffer less than people expect.

With that said, it's important to remember that we have essentially no data yet on the severity of the impact of COVID-19 on the economy, and it's possible that some of the early data could be a bit misleading for some industries, particularly ones that sell lots of staple goods and have seen consumers strip their shelves bare in recent weeks. 

Here's the big takeaway: We are likely to see some pretty bad economic news in the weeks ahead as the follow-on impact of all the business closures, canceled events, and near-shutdown of air travel and cruise industries shows up in the data. Some estimates find that 1 million people could lose work in March.

If we see some of the worst-case projections, there's a very real chance these discount retailers' stock could give back all of today's gains and then some. We just don't know what will happen in the next few months.

But though there are very real short-term risks, investors should look past the current uncertainty to when things go back to normal, maybe toward the end of 2020. Chances are, you'll see Dollar General, Dollar Tree, and Five Below stores still open for business, and probably just as busy as they were before the COVID-19 pandemic.

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Stocks Mentioned

Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
DLTR
$157.21 (1.09%) $1.70
Dollar General Corporation Stock Quote
Dollar General Corporation
DG
$247.90 (1.76%) $4.29
Five Below, Inc. Stock Quote
Five Below, Inc.
FIVE
$128.19 (4.75%) $5.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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