A few months back, I argued that "mall investing" is a trillion-dollar market, rife with investing opportunities. Indeed, the National Retail Federation estimated 2004 retail sales to be upwards of $4 trillion.

That should be reason enough to take a look at the retail industry, but I further contended that small-cap retailers -- and apparel stores in particular -- can offer superior returns by expanding their businesses rapidly while growing margins. In fact, two apparel stores, Christopher & Banks (NYSE:CBK) and Chico's FAS (NYSE:CHS), are two of the best stocks of the past 10 years, and both fit the aforementioned formula during their formative stages. Even after their remarkable ten-year runs, both are still capitalized at less than $4 billion.

Small-cap apparel stores derive such tremendous growth potential from their ability to serve and dominate an emerging fashion niche. Think about Jos. A Bank's (NASDAQ:JOSB) success with men's business and casual wear. Despite its recent setbacks, Jos.A Bank stock is still up more than 2,000% over the past 10 years.

Not always a smooth ride
Over the past 52 weeks, apparel stores as a group have returned an impressive 40%. Those returns have been earned despite a great deal of volatility -- the S&P Retail Index dipped almost 10% from Jan. 1 to July 18. Chico's, for instance, lost 48% over the same period.

So where will retail stocks go from here? Let's take that question to the street -- Main Street, that is. Allow me to introduce Motley Fool CAPS, a community intelligence database (still in beta testing) in which investors pool their expertise in order to discover the best stocks on the market.

Shoppers have spoken
The majority of investors participating in our free CAPS beta service believe the following apparel stores will continue to "outperform" the market:

Market Cap*

% Outperform Rating**

American Eagle Outfitters (NASDAQ:AEOS)



Abercrombie & Fitch (NYSE:ANF)



Chico's FAS



J. Crew (NYSE:JCG)



Aeropostale (NYSE:ARO)



*Data courtesy of Yahoo! Finance. Figures in billions.
**Source: Motley Fool CAPS as of Sept. 26, 2006

Bull against bear
As a Motley FoolStock Advisor pick, American Eagle naturally gets a lot of feedback from CAPS investors, including this bullish opinion from CAPS investor kryszrich:

American Eagle Outfitters continues to impress me. Their recently released Aerie line seems superb and their promotion of Aerie, working with the CW Network on their hit shows Gilmore Girls and Veronica Mars, is impressing and innovative. Initial reports on their offerings at their new Martin & Osa stores for adults seems very positive. This stock has doubled from its 52 week low back in late November of 2005. However, I feel they are not overpriced by any means

For a counterpoint, investor fg22 questions American Eagle's current valuation: "Retail clothing stocks are priced too high and this one is among the most severely overpriced."

Which one has it right? Or are they both wrong? You can view the American Eagle page here to make your voice heard.

To cap things off...
Apparel stores are some of the most followed stocks in the market, because investors also shop at them, or at least know someone who does. Plus, you already know how retail stores make their money -- straight from consumers like you and me -- so you won't have to spend too much time learning advanced metrics like combined ratios, as you would if you followed insurance stocks.

Our CAPS service is a great place to state your case for or against apparel stores. Not only do you get to see what Main Street investors are saying about them, but you can also see how major Wall Street houses like Piper Jaffray are trading them.

Interested? Follow this link to get in the game.

At time of publication, Todd Wenning did not own shares of any company mentioned in this article. View his CAPS page here. The Fool is investors writing for investors.