If you're thinking of giving yourself the gift of a few retail stocks for the holidays, you'd better choose carefully this year.
With consumers struggling to make ends meet, retailers are already slugging it out with promotions and deep discounts earlier and harder than at any time since the start of the Great Recession. That means investors in these share are bracing for even more profit disappointments after all the presents are unwrapped, the egg-nog is gone and Santa has scarfed down the last of the cookies left by the chimney.
"It's going to be very promotional (this year)—the customer wants great value and great bargains," former Kohl's CEO Jay H. Baker told CNBC. "The key is to take market share from your competition."
The competition for holiday shopping dollars has been intensified this year as American households continue to feel the impact of higher payroll taxes and stalled wage growth. While retail stocks as a group have been outpacing the overall market this year, the performance of individual stocks has mirrored varied fortunes of the American shopping public.
Tight household budgets have helped lift stocks of deep discounters—like Dollar General (up 20 percent in the last 12 months) and Dollar Tree (up 36 percent) and Big Lots (up 38 percent). But the fierce competition has left others behind, including Family Dollar (up 2 percent).
With the stock market setting new highs, those at the top end of the wealth ladder are also in a spending mood this year, boosting profits for high-end retailers.
One big reason: Not all luxury retailers' customers are rich.
"Going into the holidays, I would stick to stocks of companies that are selling things that people really want to buy—Michael Kors, Nike—where the customer will pinch pennies elsewhere," said Faye Landes, who follows the retail industry at Cowen & Company. "These companies are making things that people are dying to have, waiting in line to have."
Kors' stock this year (up 57 percent) has been as hot a seller as his $2,000 crocodile-embossed leather satchels, available at the company's chic Fifth Avenue storefront in Manhattan, or online from Sears. Even as stretched households are having trouble making ends meet, they're still finding ways to get at least a taste of the good life.
Roughly half of U.S. consumers are expected to buy at least a small luxury item in the next six months, including 53 percent who are likely to buy specialty food or drinks, 48 percent to buy luxury clothing and 48 percent to buy personal care products, according to a survey last week from Accenture.
(Read more: How savvy retailers are reinventing the pop-up model)
"Consumers want a taste of luxury in their everyday lives and are willing to spend a little extra for the experience," said Tom Jacobson, a consultant with the firm. "But the emphasis is on small items."
Retailers like Tiffany, whose stock is up 33 percent, are happy to oblige. The classic brand name is available on everything from a pair of entry-level silver bead earrings ($125) to a diamond-encrusted, white gold Tonneau cocktail watch ($75,000).