Retail is full of ups and downs, and over the past year, we've seem more downs than ups. With concerns about economic slowdowns, real estate bubbles bursting, high gas prices, and dwindling growth in home equity loans to power consumer spending, maybe it's understandable.

Trouble at the big boxes
The biggest of the big-box retailers, Wal-Mart (NYSE:WMT), has seen its sales and same-store sales slow down as of late. And while it certainly is a great company, its stock price has gone nowhere for the past five years following the irrational exuberance at the turn of the millennium.

Those same forces have caused Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) to experience slowdowns as well, and both companies have seen their stocks drop over the past 12 months.

Trouble at home
Moving from big-box retailers to home-decor retailers such as Pier 1 (NYSE:PIR) and Williams-Sonoma (NYSE:WSM) paints an even more dismal picture. These two companies have struggled, and I mean struggled. Pier 1 has been in turnaround mode for what seems like a thousand years (well, that's a bit of an exaggeration -- it's more like two to three years), and Williams-Sonoma's Pottery Barn seems to have lost its magic touch. Can you guess where the stock prices have gone?

Not every retailer is the same
With all of the slowing growth, struggling retail concepts, and overall market malaise, should investors just forget about retailers in general? That certainly would seem like a prudent thing to do, but not every retailer has had problems this year. Among the winners are Dick's Sporting Goods (NYSE:DKS) and Guess? (NYSE:GES).

With so much confounding data, what's an investor to do?

Our solution
While it's fun to look at last year's winners and losers, we're more concerned with next year and beyond. And in Stocks 2007, we're looking to profit from the panic in retailing, where the market has beaten down some good companies, making them very attractive investment opportunities.

These stocks exhibit the three basic characteristics that can make for successful retail investing:

  1. Good growth prospects.
  2. Solid margins and returns on invested capital.
  3. A misstep along the way created lots of negative sentiment.

While all are important, the third one especially creates the opportunity to buy a good business at a good price -- the best way to beat the market.

You can look for businesses like this on your own. Or, if you'd like three retail recommendations from us, check out Stocks 2007: The Investor's Guide to the Year Ahead.

Retail editor and Inside Value team memberDavid Meierdoes not own shares in any of the companies mentioned. Wal-Mart and Home Depot are Inside Value recommendations. The Fool takes its disclosure policy very seriously.