Q: Does anyone in particular come to mind? A: Exstein: Clearly, a company like Bon-Ton Stores (BONT), which made a major acquisition two years ago and financed it all with debt, is now suffering with a very leveraged balance sheet. A leveraged buyout that has gone sour is Mervyn's, a department-store chain. What you are now seeing, particularly with the old-line department stores, is about survival and thinking about the balance sheet first and the P&L second.

Q: What else looks interesting? Exstein: The only stock we began emphasizing at the beginning of the year was Wal-Mart, which we also rate Outperform. It was purely based on their decision to slow capital spending and new-store growth, which would allow them to focus on their current store base and execute better, and that is what has happened. In addition, they have been in the right place with consumables and very competitive prices. So it all came together for Wal-Mart, and we continue to like that stock.

Q: The credit crisis has a huge impact on retailing. Who in particular is vulnerable? Exstein: The least vulnerable company is Wal-Mart (WMT), which made a strategic decision in 2006 to pull back from capital spending. They are really getting the full impact and benefit of that this year. Conversely, a company like Target (TGT), which is a terrific company, made a decision two years to grow its receivables dramatically, and they are now getting pressure because of that.

Q: What about Sears? Balter: We are quite negative on their prospects, as they have underinvested in both Kmart and Sears. Their Ebitda [earnings before interest, taxes, depreciation and amortization] dropped from $3.6 billion in 2006 to $2.5 billion last year, and we project it being about $1.6 billion this year.

Q: What kinds of retailers are best positioned to weather this storm? Balter: The smaller the ticket, the lower the cost of the item, and the more of a necessity it is, the more likely you are going to buy it. So in my coverage area, it is [do-it-yourself auto companies] such as Advance Auto Parts (AAP), AutoZone (AZO) or O'Reilly Automotive (ORLY) because their products are required. Right behind them is PetSmart (PETM), because you are probably going to continue to feed your pet. But in terms of selling necessities, all of those trail Wal-Mart, Family Dollar Stores (FDO) and Costco Wholesale (COST).

Q: What kinds of retailers are best positioned to weather this storm? Balter: The smaller the ticket, the lower the cost of the item, and the more of a necessity it is, the more likely you are going to buy it. So in my coverage area, it is [do-it-yourself auto companies] such as Advance Auto Parts (AAP), AutoZone (AZO) or O'Reilly Automotive (ORLY) because their products are required. Right behind them is PetSmart (PETM), because you are probably going to continue to feed your pet. But in terms of selling necessities, all of those trail Wal-Mart, Family Dollar Stores (FDO) and Costco Wholesale (COST).

Q: On that note, let's hear a few of your investment ideas. Balter: I'll start with O'Reilly Automotive, which we rate Outperform. We like them for a number of reasons, although it is a 2009 or 2010 play. We don't really have a lot of '08 plays, given the environment. But O'Reilly just bought a company called CSK Automotive. O'Reilly's operating margins, prior to the acquisition, were in the 12% range; CSK Auto's were in the 3% range. O'Reilly's sales mix is different than Advance Auto's or AutoZone's, because they have a bigger commercial business. In contrast, CSK Auto is 82% retail and 18% commercial, and it actually does higher volumes at the retail level per store than O'Reilly does. It has a very strong market share on the West coast, as well as in Arizona, Minnesota and Chicago. As O'Reilly introduces its infrastructure and its systems to CSK and drives up its commercial business, we see significant opportunity for margin expansion next year and in 2010.

Q: What kinds of retailers are best positioned to weather this storm? Balter: The smaller the ticket, the lower the cost of the item, and the more of a necessity it is, the more likely you are going to buy it. So in my coverage area, it is [do-it-yourself auto companies] such as Advance Auto Parts (AAP), AutoZone (AZO) or O'Reilly Automotive (ORLY) because their products are required. Right behind them is PetSmart (PETM), because you are probably going to continue to feed your pet. But in terms of selling necessities, all of those trail Wal-Mart, Family Dollar Stores (FDO) and Costco Wholesale (COST).