Cramer: Only place in retail with upside left

Cramer: Only place in retail with upside left

At a time when most of the retail group is in a world of pain, Jim Cramer found two remaining retail stores that took Wall Street by surprise when they reported blowout quarters in the past few weeks.

After getting pounded along with the market in the third quarter, dollar store chains Dollar Tree and Dollar General have been rearing lately.

"I think this is one part of retail that still has a lot of upside," the "Mad Money" host said.

Cramer's reasoning took into consideration the recent tremendous job growth in the economy. While there may be a growing employment number, wages are not increasing. Thus, consumers are still feeling cash-strapped due to stagnant wages, increasing health care costs and the rising cost of rent.

In short, there is a large group of consumers that still feel like they can only afford to shop at places that feature terrific bargains, like Dollar Tree and Dollar General.

I think this is one part of retail that still has a lot of upside.
Jim Cramer

The plummeting price of gasoline and natural gas does help, but it seems to Cramer that people are spending that additional money at low-end value oriented stores, rather than the high-end retailers.

"Put it all together, and this is a strong environment for Dollar Tree and Dollar General, and the truth is that I like both companies a great deal, Cramer said.

And while both companies are in the same line of business, their stories are actually quite different. After an intense bidding war, Dollar Tree acquired Family Dollar for $8.5 billion in cash and stock in July. This deal transformed the industry from domination of three companies, to a two-way duopoly. Dollar Tree became the No.1 player in the space.

Read more from Mad Money with Jim Cramer

Cramer Remix: Forget Chinatown—this is crazy town
Cramer's game plan: Bring it on, Fed
Cramer: My boring, nerdy way to beat Wall Street

Dollar General's story is more about internal improvements and returning capital to shareholders. Its stock was hit hard from late August to mid-November. Unlike Dollar Tree, the stock remains well off from its 52-weeks highs. When it reported earnings last Thursday, it not only beat Wall Street's estimates but also announced a $1 billion buyback.

So which of the two options does Cramer recommend buying?

Dollar Tree may have more potential upside, thanks to its acquisition, it also has more risk. Any sort of issue in the merger integration could crush the stock, and it is rare for everything to go as planned.

Dollar General on the other hand, is a consistent company with a solid growth story and a classically undervalued stock.

"All things considered, if you like the dollar store space, I think that General Dollar is the safest, smartest way to play it right now," Cramer said.

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram - Vine

Questions, comments, suggestions for the "Mad Money" website?

Related Tags