ATTENTION BACK-TO-SCHOOL SHOPPERS:

Retail stocks are on sale.

Tiffany], middle [Sears Holdings] and low [Wal-Mart, Target]. The S&P 500 retailing index is down nearly 10% from its high in May and the S&P Apparel index is down 9.5% year-to-date.

As a sporadic shopper myself, I generally steer clear of these stocks, especially specialty retailers. Whether Abercrombie & Fitch is "in" or "out" with teenage trend-setters of the moment isn't something I want to worry about, let alone wager money on. But fashion trends aside, when investors abandon the whole sector, retail stocks appeal to me.

High gas prices have clouded prospects for some time, first depressing shares of discount chains, notably Wal-Mart, and spreading more gradually to midlevel retailers like Kohl's and J.C. Penney. While the notion that high gas prices and correspondingly lower discretionary income would depress retail sales makes sense, I haven't yet seen any studies that document the relationship. Overall, consumers have kept spending at a surprisingly consistent rate, which means they're finding the extra money somewhere.

One possibility is savings, though Americans are notoriously low savers. Another is cash from mortgage refinancings. But as recent disappointing earnings rolled in, many investors have decided that those sources have now been depleted. Consumer confidence is likely to be further eroded by the end of the real estate boom and continuing high fuel prices.

The wealthy were supposed to be immune from all this. But Tiffany's earnings decline of nearly 20% last week raised the specter that even the well-to-do may have over-extended and are beginning to tighten their belts. In any event, it's hard to generalize about the affluent. In the Midwest where I grew up, some of the richest people in town were also the thriftiest.

I agree that things look pretty bad for retail spending. But so does everyone else. It's precisely when things look the worst that you want to buy stocks in the retail sector. One thing you can count on is that sooner or later, Americans will be spending again.

One way to invest is a broad-based consumer discretionary sector fund, such as the Consumer Discretionary Select SPDR Fund. This not only gives you diversification in the retail area, but also similarly depressed sectors like entertainment, restaurants and leisure. But maybe an ETF is too diversified. XLY's biggest holdings include Target, but also entertainment conglomerates like Disney and Viacom. While a rising tide of consumer spending will lift most of these stocks, some will inevitably do much better than others.

So what individual retail stocks might outperform the sector? For advice I called my niece, Laura, a recent college graduate who lives in Indianapolis. She's not a stock picker, but a perceptive shopper and trend-spotter. She likes American Eagle Outfitters over Abercrombie & Fitch (same fashion savvy, better value and quality); H&M and Target over Wal-Mart or Sears; Ann Taylor and Nordstrom for post-college career wear. The biggest surprise: She tells me that Gap is gaining traction with its back-to-classics fall merchandise.

Even I can tell from the T-shirts I see worn on New York City sidewalks that American Eagle is hot, which as an investor makes me nervous, given the quixotic nature of fashion trends. American Eagle and A&F have also defied the slumping trend in retail shares, with Eagle near its high and Abercrombie well off its lows after reporting strong back-to-school sales. Both are opening new chains to broaden their demographic appeal and spur continued growth, but these markets may be nearing saturation. I prefer being a contrarian in retail, which is why Gap appeals to me. If once-stodgy J. Crew can generate a turnaround, why not Gap? The most recent same-store sales figures didn't yet show much progress, but Gap's shares are less than a dollar off their 52-week lows. I also like Nordstrom for its appeal to more affluent consumers, though its shares have already rallied off the low they hit in July.

This is definitely an area where you don't need to rely on my suggestions. If you have a modicum of fashion sense and don't mind making some field trips to the mall, you might be able to do much better. In any event, while spending on back-to-school purchases, why not think about making some money? You might be able to make a fashion habit pay off.