In this article, we will be taking a look at the 10 best discount retailer stocks to buy. To skip our detailed analysis of the retail sector, you can go directly to see the 5 Best Discount Retailer Stocks to Buy.

Bargain Hunting in the US

The US economy’s consistent battle with inflation has resulted in consumer spending habits being reshaped and transformed. Where once the shopping season saw consumers succumbing to higher prices as long as they brought back high-quality products for themselves and their loved ones, the fourth quart of 2023 saw a new trend emerging: bargain hunting.

Deloitte published an Emerging Retail Trends Report for the fourth quarter, which delved into the rise of this new trend. According to the report, US consumers are now seeking value in their purchases and avoiding high-priced items. They are beginning to “hunt” for bargains and deals, often frequenting discount retailers and off-price stores in favor of their usual shopping haunts in hopes of meeting their new needs. As a result of this shift in shopping behaviors, discount retail companies such as Walmart Inc. (NYSE:WMT), The TJX Companies, Inc. (NYSE:TJX), and Costco Wholesale Corporation (NASDAQ:COST) can be considered well-placed to benefit from this emerging trend.

A Shift To Off-Price Retailers

The Deloitte report noted that while 2021 and 2022 saw luxury retailers experiencing strong growth, 2023 saw this growth slowing. The second quarter of 2023 saw huge declines in growth for several luxury brands, some even suffering drops as high as 23%. As a result of this, many of these companies were seen to be prioritizing their discount business divisions, as these were the units attracting the most consumers.

As mentioned above, this shift in consumer spending habits and attitudes is beginning to prove overwhelmingly beneficial for discount and off-price retailers. For instance, The TJX Companies, Inc. (NYSE:TJX) was mentioned by the Deloitte report as a discount retailer that reported “strong gains in profit and revenue” in its latest earning report. In the third quarter, The TJX Companies, Inc. (NYSE:TJX) reported a revenue of approximately $13.3 billion, growing 9.03% year-over-year and beating estimates by $183.1 million. The company has reportedly benefitted immensely because of the increase in customer traffic after the shift to bargain hunting. Additionally, with many luxury retailers now finding their stores practically empty, companies like The TJX Companies, Inc. (NYSE:TJX) have also found themselves gaining access to premium inventory items sold off by high-end retailers.

The shift to off-price retailers does not mean, however, that consumers don’t want high-quality products anymore. They merely want to be more cautious in their approach to shopping now. By going to discount retailers hoping to find premium products on sale, they are doing just that.

Retaining Customer Loyalty

According to the report, the only way luxury and discount retailers can regain and retain their customers is to work on increasing customer loyalty. Acts like simplifying the return process and engaging with customers over social media helpfully can go a long way in this respect. However, the actions of some retailers after the recent holiday season have been going in the exact opposite direction. On December 26, CNBC’s “Squawk Box” team discussed how several retail companies have begun charging return fees to their customers after the holiday season. Additionally, retailers are also now shortening the return window for items purchased online. It was noted that about 40% of retailers are beginning to charge their customers for online returns, a 9% increase from the 31% figure reported in 2022.

This new development in the retail sector may have emerged as a desperate bid to retain profits. However, it is likely that such policies will alienate customers rather than increase their loyalty to a certain brand. In the long run, it may be inadvisable for retail companies to succumb to such measures, as the Deloitte report clarifies. The Squawk Box team also seemed to agree with the report in noting that “nothing would disrupt customer loyalty” more than placing huge return fees on purchased items.

Regardless of the above, it is evident that in the current market economy, consumers prefer stores that offer them products at discounted prices or as part of attractive deals. As a result, discount retailers are not only gaining popularity among the consumer base but also among investors as their profitability surges. As such, we have compiled a list of the best discount retailer stocks to buy. These include some of the best department store stocks to invest in, alongside several top discount retailer stocks for the long term.

Our Methodology

We selected the names for our list of the best discount retailer stocks to buy by consulting Insider Monkey’s hedge fund data for the third quarter of 2023. The stocks are ranked based on the number of hedge funds holding stakes in them, from the lowest to the highest. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.

Best Discount Retailer Stocks to Buy

10. BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ)

Number of Hedge Fund Holders: 27

BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) is a consumer staples merchandise retail company based in Marlborough, Massachusetts. The company operates membership-only warehouse clubs offering customers the chance to buy products in bulk at discounted prices.

As of February 7, Gordon Haskett’s Chuck Grom maintains a Hold rating and a $70 price target on BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ).

Our hedge fund data for the third quarter shows 27 hedge funds long BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ). Their total stake value in the company was $338.7 million.

Impax Asset Management was the largest shareholder in BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) at the end of the third quarter, holding 89,955 shares in the company.

Here’s what Fiduciary Management Inc. said about BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) in its fourth-quarter 2023 investor letter:

“BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ)’s is the third largest warehouse club operator in the U.S., with locations primarily along the East Coast. The warehouse club business model has many attractive characteristics, offering a limited number of items in each product category (sold in large pack sizes) which allows them to drive down purchasing costs. These companies have low operating costs, efficient distribution networks, and are typically located in low-cost areas. Their no-frills stores, simple operations, and large real estate footprints create labor efficiencies. This allows for merchandise to be offered at very sharp prices. Customers gain access to these low prices by purchasing annual memberships to the clubs, which have high retention rates and generate steady, recurring revenue. The business earns high returns on capital despite low prices and operating margins. BJ’s has a checkered history but has made significant improvements to the business over the past decade. The market remains skeptical as to how sustainable these improvements are and how well they can compete against strong peers in the warehouse club industry. We believe this misses the mark, as the club industry commands a small share of a vast retail market. We believe all of the warehouse club operators can grow and take share from indirect competitors that can’t match their pricing. If this proves out, we believe BJ’s valuation multiple should re-rate higher to better reflect the underlying strength of its business model.”

Like Walmart Inc. (NYSE:WMT), The TJX Companies, Inc. (NYSE:TJX), and Costco Wholesale Corporation (NASDAQ:COST), BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) is one of the best department store stocks to buy now.

9. Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI)

Number of Hedge Fund Holders: 28

Steven Shemesh, an analyst at RBC Capital, maintains an Outperform rating and an $86 price target on shares of Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) as of December 7.

Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) is a broad-line retail company based in Harrisburg, Pennsylvania. It operates a chain of discount closeout retailers under the Ollie’s Bargain Outlet, Good Stuff Cheap, and Cheap! brand names, among more.

Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) was spotted in the 13F holdings of 28 hedge funds at the end of the third quarter, with a total stake value of $529.8 million.

Wasatch Global Investors mentioned Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) in its third-quarter 2023 investor letter:

“The third quarter’s top contributor to strategy performance was Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI). The company’s stores offer a constantly changing selection of close-out items and other brand-name merchandise at deeply discounted prices. A steady flow of inventory acquired from distressed retailers has attracted customers to Ollie’s and boosted sales. In the company’s most recent quarter, net sales rose a better-than-expected 13.7% year over year, driven by an increase of 7.9% in comparable-store sales and the addition of six new locations. With margins and earnings also exceeding estimates, management upped its guidance for fiscal year 2023. Because the discounts at Ollie’s help consumers stretch their dollars, we think the company is better situated than most other retailers in the current inflationary environment.”

8. Five Below, Inc. (NASDAQ:FIVE)

Number of Hedge Fund Holders: 30

At the end of the third quarter, Lee Munder Capital Group was the most prominent shareholder in Five Below, Inc. (NASDAQ:FIVE).

Five Below, Inc. (NASDAQ:FIVE) is a specialty value retailer based in Philadelphia, Pennsylvania. The company’s discount stores offer accessories, cosmetics, personalized living space products, and more.

An Overweight rating was maintained on shares of Five Below, Inc. (NASDAQ:FIVE) on January 29 by Matthew Korn, analyst at JP Morgan. The analyst also raised his price target on the stock from $217 to $222.

We saw 30 hedge funds long Five Below, Inc. (NASDAQ:FIVE) in the third quarter. Their total stake value in the company was $679.6 million.

This is what Wasatch Global Investors said about Five Below, Inc. (NASDAQ:FIVE) in its third-quarter 2023 investor letter:

“Another weak stock in the strategy was Five Below, Inc. (NASDAQ:FIVE). This discount retailer has set itself apart with its branding and unique approach of, as its name suggests, pricing most items at five dollars or less. Second-quarter revenues and earnings met expectations, and management projected that third- and fourth-quarter revenues would be in line with forecasts and better than industry peer comparisons. But the stock was down because upcoming quarterly margins and earnings are projected to decline due to theft and expenses associated with theft prevention. While this news was disappointing, we think management has responded appropriately. We still expect the company’s new-store growth rate to accelerate from the low teens to the high teens over the next 12 months. Five Below plans to add approximately 250 new locations, which we think will position the company to take advantage of both the 2023 and 2024 holiday shopping seasons.”

7. Macy’s, Inc. (NYSE:M)

Number of Hedge Fund Holders: 32

Macy’s, Inc. (NYSE:M) was seen in the portfolios of 32 hedge funds in the third quarter. Their total stake value in the company was $357.8 million.

Based in New York, Macy’s, Inc. (NYSE:M) is another broad-line retail company on our list of the best discount retailer stocks to buy. The company operates several stores, including the Macy’s Backstage Outlet, an in-store discount clothing store.

As of February 2, Paul Lejuez, an analyst at Citigroup, holds a Neutral rating on shares of Macy’s, Inc. (NYSE:M). The analyst also raised his price target on the stock from $14 to $18.

Impax Asset Management was the largest shareholder in Macy’s, Inc. (NYSE:M) at the end of the third quarter, holding 41,000 shares in the company.

6. Dollar General Corporation (NYSE:DG)

Number of Hedge Fund Holders: 38

Dollar General Corporation (NYSE:DG) is a consumer staples merchandise retail company. It is based in Goodlettsville, Tennessee. The company offers consumable products, packaged foods, and perishables through its discount retail stores.

A total of 38 hedge funds were long Dollar General Corporation (NYSE:DG) at the end of the third quarter. Their total stake value in the company was $1.1 billion.

Mawer Investment Management made the following comments about Dollar General Corporation (NYSE:DG) in its third-quarter 2023 investor letter:

“On the other hand, not all businesses were able to hold up well this quarter; certain names were hit by short-term market sentiment and expectations. Dollar General Corporation (NYSE:DG)’s reported lower operating margins, suggesting that the company’s ability to pass along additional price increases appears limited given the pressures facing its customers.”

Like Walmart Inc. (NYSE:WMT), The TJX Companies, Inc. (NYSE:TJX), and Costco Wholesale Corporation (NASDAQ:COST), Dollar General Corporation (NYSE:DG) is among the best discount retailer stocks to buy.

Click to continue reading and see the 5 Best Discount Retailer Stocks to Buy.

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Disclosure: None. 10 Best Discount Retailer Stocks to Buy is originally published on Insider Monkey.