Buy low ... sell high. Anyone can tell you that's the secret to making money in the stock market. But Foolish investors know the job of finding undervalued stocks is not simple. What's likely to work in today's unstable market? For any set of market conditions, you need a strategy that makes sense and is not obvious to the majority of other investors.

One promising retail strategy
Retail is in the tank -- we all know it. So investors have the choice of giving up on the industry entirely or seeking a strategy to find value where others don't. For those who prefer the latter, who believe Warren Buffett when he says, "You pay a high price in the market for a cheery consensus," here's one strategy for retailers today that shows promise.

Look for companies that:

  • Have great track records
  • Are winning the battle in their retail niche
  • Have depressed stock prices.

No doubt they're having a bad year -- in retail, who isn't? The company with these three elements will most likely return to its winning ways when consumer spending picks up again, particularly with niche players who will be up against a weakened competition.

Beware the law of large numbers
I'm not talking about mass merchants like Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), or Best Buy (NYSE:BBY). Yeah, these are all great companies that will do a ton of business the next few quarters. But consumers are not in a mood to open their wallets as wide as they did last year, and the law of large numbers is working against the big-box stores. A slowdown in consumer spending means the big boys are forced to duke it out on price.

Three stocks that fit this description
The three companies below have been on top of their game for many years, and their trailing-five-year earnings per share (EPS) growth rates prove it. Each one is also in the middle of a disappointing year. Their stock price is down for a reason. But remember, the best way to sell high is to buy low.   

Company

P/E *

Current Price

 Versus
52-Week
High

5-Year
Growth**

Bed Bath & Beyond (NASDAQ:BBBY)

      15.0

$32.15

(26%)

18%

Men's Wearhouse (NYSE:MW)

       9.3

$31.66

(44%)

44%

Aaron Rents (NYSE:RNT)

      13.0

$19.79

(36%)

21%

Source: Yahoo! Finance.
* Trailing 12 months.
** Average annual EPS growth for the previous five years.

Bed Bath & Beyond
I think the market is sour on Bed Bath out of sheer disbelief. Here's a company that hasn't delivered annual comp sales growth less than 3.8% in its history as a public company. It's true that the glory days of 20% sales and 30% earnings growth are long behind it. And it's true that just about every store sells some kind of home furnishing.

But Bed Bath wins in the home sector because it is the top merchant for combining selection, price, and quality with the best real-estate locations, not to mention a fanatical dedication to cost control. It's as simple as that, and it's no wonder the company is a Motley Fool Stock Advisor and Inside Value pick.

Men's Wearhouse
This is a different story. I remember when everyone thought the days were numbered for a company that sold only men's formal attire -- the only way to make the business model work, it was assumed, was in a department store. But for 34 years, George Zimmer has proven the experts wrong.

I admire the company because it knows customer service and knows how to sell. It's nearly impossible to walk out with just a suit or sport coat. From ties to slacks to outerwear to socks, these people know how to get men to pony up for the full assortment.

The company appears to have hit a wall this year with the acquisition of After-Hours Formal Wear, but it looks to me like a temporary setback. Tuxedo rental is a solid fit with the company's core business, and it's a retail niche that's comprised of small local or regional players -- ripe pickings for a niche-dominant player. At a P/E of less than 10, this stock appears to have a lot more upside than downside.

Aaron Rents
This one sounds like a quirky pick. The company is not the largest in the niche, and it provides rent-to-own appliances and electronics to people who generally can't afford to buy them. Dare I mention the dreaded subprime? But while subprime customers may be in temporary hibernation, they're not going away permanently.

Aaron Rents has a solid history of controlled growth, good operating margins, a capital structure to debt/equity ratio of 23%, and a TIE ratio of 10.7 -- that should allow it to weather the storm. The company recently announced a hike in the dividend and increased its share repurchase program -- certainly not an indication of impending financial difficulties.

Its major competitor, Rent-A-Center (NASDAQ:RCII), just announced the intention to close about 8% of its stores. This could be viewed as a bad sign for the industry, but Aaron Rents reported decent sales and comps growth in the most recent quarter. Fewer competitor stores should mean more growth opportunities in the future.

Timing is everything
I'm not suggesting these stocks will evaporate tomorrow or next week. Retail in general continues to look saggy. But it's likely the industry will have better prospects in 2008, meaning investors will rotate back into retail stocks. Not a bad time to own a few.

For more Foolish takes on the retail industry:

Rent-A-Center, Best Buy, and Wal-Mart are Inside Value picks; Costco and Best Buy were selected by Stock Advisor. You can pick up a free, 30-day trial of either newsletter.

Motley Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares of Wal-Mart and Costco, but no shares of other companies in this article. The Fool has a disclosure policy.