Dollar General Oversold a 12 Trades Per Year Add

StockSpotify.com

We think Dollar General is oversold.  The drop has warranted it as an addition to our 12 Trades Per Year Portfolio.

We hope to continue our winning streak with this latest addition.  Year to date we have had a 100% win rate with only a handful of trades.  We currently have only one other open position with VeriFone (NYSE:PAY) and today we have added Dollar General (NYSE:DG).  Closed positions YTD are United Rentals (NYSE:URI), United States Oil Fund (NYSE:USO) and Pandora (NYSE:P).

A whole lot went well for Wal-Mart earlier this quarter, and that led to a slowdown at Dollar General.

This ends a multi-quarter trend of DG outperforming discount peer WMT.

Although WMT ate market share, DG comped positive and maintained strong long-term earnings guidance still.

Regardless of the misfire in the quarter, DG’s long-term growth story as a discount retailer starting to attract higher-income shoppers remains largely intact.

We think the stock can reach $85 by year end.

The company misfired this quarter, also it doesn’t help that main competitor Wal-Mart (NYSE: WMT) set up very good numbers, however, the long-term growth story remains intact. Shares seem undervalued now, and we think this can be a good time to accumulate DG.

The story here is that WMT has finally struck back against the dollar stores. For an extended period both DG & Dollar Tree (NASDAQ: DLTR) have reported greater results than WMT.

 

That trend, however, reversed this past quarter suddenly, as comps at DLTR and DG both slowed while WMT set up its best comp number in a number of quarters. There are many things at play here. Firstly, WMT is expanding grocery and that appears to be hurting grocery sales at DLTR and DG. Secondly, WMT has been cutting prices aggressively. Thirdly, WMT completed a nation-wide rollout of Wal-Mart Pay just. Fourthly, WMT is making huge inroads using its e-commerce business, including acquiring Jet.com and launching its Amazon (NASDAQ: AMZN) Prime-like feature called Shipping Pass.

A whole lot happened with WMT earlier this quarter, and the aggressive moves paid off, therefore the discount retailer landscape has changed. DG, though, didn’t cut its long-term earnings guidance of 10-15% growth each year. Although WMT upped its game in the recent quarter, DG will inevitably respond and we think it’s rather unfair to assume either DG or WMT may be the victor into perpetuity.

Quite simply, one poor quarter doesn’t really affect the future growth story here. While comps were worse than expected, these were still positive and can likely remain positive for the next many years given the business’s robust positive comps history.

Slight reductions in long-term growth don’t warrant the 20% drop shares saw in trading on Thursday, 8/25. Regardless of the slower top line story, margin increase, earnings are up 18% up to now this year, cash flow is up 36%, and the company continues to give back a lot of money to shareholders.

 

With this recent sell-off. We don’t see much valuation risk anymore as the stock is now trading at 15x our FY17E EPS, and this low-to-mid teens range has somewhat served as a bottom for the forward multiple since 2014.  To become a member of StockSpotify and receive market alerts that can increase your net worth join here.