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​Tiffany or Dollar General: Which stock to buy?

For a long while, Tiffany (TIF) was No. 1 on Wall Street's list of glamorous retailers, with a stock that usually attracted "buy" recommendations. Not anymore. It's now rated as a "sell" or "underperform" by several major analysts. On the other side of the retailing divide, shares of deep-discount retailer Dollar General (DG) have soared, riding high on its theme as a one-stop, low-price destination for value-conscious shoppers.

Even as Tiffany and Dollar General cater to different types of shoppers, Wall Street measures their value mainly on the same basic metrics: earnings and revenue growth. Of late, Tiffany has been a big disappointment on both scores, which has prompted S&P Global Market Intelligence (formerly S&P Capital IQ) to downgrade the stock to a "sell" from a "hold." It slashed its price target by $28 a share to $59; the stock closed on Friday at $71.84.

On the other hand, S&P recommends Dollar General as a "buy" and boosted its price target by $11 a share to $88; it's closed on Friday at $85. "We value DG in the upper portion of its historical range and at a premium to its three-year average of 16 times its forward price-earnings estimate," said S&P equity analyst Efraim Levy. "We expect upper single-digit sales growth and improving margins through fiscal 2018," he added.

So, should investors dump luxury retailer Tiffany and load up on discount outlet Dollar General? There's a minority view -- credible, if not obvious -- that both stocks should be part of an investor's portfolio for complete exposure to the wide world of retailing. Both are plays on the consumer, and there's no doubt that consumer confidence has rebounded and is at comforting levels.

And despite the disparity in size and type of markets each caters to, both Tiffany and Dollar General have some common characteristics, including great potential for further growth in earnings and sales, leadership if not dominance in their segments, gross margin stability, low valuation and strong brand names.

For sure, Tiffany has some holdout bulls on Wall Street who focus on the stock's depressed valuation, which they believe is unjustified based on the company's history. And they make a convincing argument. "Valuation is the silver lining" in assessing Tiffany's worth, argues Robert Drbul, equity analyst at Nomura.

"We continue to believe in the value of the Tiffany brand and its significant global growth potential, although (we) acknowledge near-term pressure from foreign exchange and macro volatility remain," he added. He's maintaining his fourth-quarter EPS estimate of $1.41, slightly above the consensus projection. "While we remain wary of continued lackluster tourism trends affecting sales in the U.S., we continue to believe global demand remains healthy," he said.

Tiffany is scheduled to report fourth-quarter earnings on Friday Mar. 18, and Drbul said he's looking forward to the conference call with analysts and investors, which will mark the first time management will host a question-and-answer session. He hopes to get further "clarity and detail" on "go-forward" strategy at the coming Analyst Day in New York on April 12.

In the two-month holiday period of November and December, 2015, sales at Tiffany declined 3 percent worldwide, and same-store sales (sales at stores open a year or more) slipped by 5 percent. Drbul forecasts further declines in the fiscal fourth quarter ended Jan. 31, 2016, as the company continues to see reduced foreign tourist spending in the U.S. due to the dollar's strength.

The good news? Drbul is encouraged by continued gross margin stability. "We expect gross margin to expand 40 basis points to 61.2 percent in the first quarter, and for levels to remain healthy throughout 2016," he said. He also expects management to focus on disciplined cost control. So, he's maintaining his earnings estimate of $3.85 per share for fiscal 2016 even as he expects minimal sales and earnings growth. Drbul expects strong tourist trends in regions where currencies have weakened, including Japan and Europe, to partly offset sluggishness in the U.S.

With Tiffany shares trading at 18 times his 2016 earnings estimate, versus a three-year average of 22 times forward profit projections, "we see value and believe challenges are fully incorporated in the price of the shares," said Drbul. He has a price target of $90 for Tiffany's stock.

On the other end of the spectrum, Dollar General's stock has vigorously snapped back in the past five months, from a 52-week low of $59 to a new high of $85, which has prompted some analysts to raise their price targets. Part of their renewed optimism is based on the company's fourth-quarter results as well as management's outlook, which was above many analysts' expectations.

And this is at a time when the company's low- and lower-middle-income customers have been feeling the pinch of higher payroll taxes, government benefit cuts and continued job problems, noted some analysts.

"We believe Dollar General is among the most attractive investment stories in retail," said Taylor G. LaBarr, equity analyst at investment firm Stifel, who rates the stock as a "buy" and raised his price target to $90 a share from $80. The company has completed its transition to a "high-return, high-consistency cash-flow story," he noted.

"Further, we view the company's shift to a long-term earnings algorithm as a positive as it helps signify the stability in the model," said Scott Ciccarelli, equity analyst at RBC Capital Markets, who rates Dollar General as "outperform," with a raised price target of $91 a share, from an earlier $83. He believes the environment for its customers "continues to slowly improve," which helps broaden the customer base through a combination of low prices and conveniently located stores.

Dollar General operates about 12,000 discount stores in 43 states. About 70 percent of the communities they're in have populations of less than 22,000. In 2015, consumables, such as paper and cleaning products, food, beverages and snacks, health-beauty products and pet supplies accounted of 75.7 percent of net sales. Seasonal merchandise generated 12.4 percent, home products, 6.4 percent and apparel, 5.5 percent.

With Walmart (WMT) and Family Dollar, which is now a unit of Dollar Tree (DLTR), reducing square footage growth and lower-income workers making headway with wages, "we think there is a reasonably good chance that same-store sales will improve for Dollar General," said Daniel Binder, equity analyst at investment firm Jefferies.

He rates Dollar General as a "buy" and has raised his 12-month price target to $96 a share from $81. He forecasts earnings of $4.56 a share in fiscal 2017 and $5.08 in fiscal 2018, up from fiscal 2016's $3.96.

You could buy just one or the other of these two retailers, but it's also worth giving some thought to buying both.

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