Yes, we are in the prime shopping period of the year, but Americans do not stop shopping on Christmas Eve. Many retailers, while getting a boost from the holiday season, do well 12 months a year. Indeed, some retailers do well not just seasonally, but are well positioned no matter what is happening in the nation's economy.
One such retail "subspecies" that does well year round and in a variety of economic conditions is the so-called dollar stores. These retailers sell lots of individual items at low prices, often for around a buck. The stores are small and plentiful, making them convenient to a wide variety of shoppers who are looking to stretch their money, and relatively inexpensive to run.
Lest you think only lower-income folks frequent such stores, a few years ago The New York Times reported that while 42% of dollar-store customers earn no more than $30,000 a year, driving the industry's growth were affluent households. Lots of better-off consumers love a bargain.
The two big players in the dollar-store industry are Dollar Tree (DLTR) and Dollar General (DG). Dollar Tree, which only sells items for $1 or less, operates over 14,000 stores in the U.S. and Canada. Dollar General, which sells items for more than $1 but always priced at a heavy discount, has 12,000 stores in the U.S.
To choose stocks to recommend, I rely on a bundle of automated strategies I created that mirror how highly respected investors decide where to put their money.
One of these strategies, based on the writings of James P. O'Shaughnessy, favors Dollar Tree. It likes the company's large market cap ($18.3 billion), earnings per share that have increased in each of the last five years, and its price-to-sales ratio, which identifies growth stocks still cheap to buy. Finally, the strategy looks at the stock's relative strength, which is how well the stock has performed in the past 12 months vs. the market's performance. The O'Shaughnessy-based strategy picks 50 stocks worth buying based on all of these variables, and Dollar Tree comes up as a definite "buy."
So does its big competitor, Dollar General. This company has an approximate $20.7 billion market cap, earnings that have increased consistently for five years, a low price-to-sales ratio and relative strength that places its stock in the top 50, like Dollar Tree.
Let me also note that Dollar General is not only favored by my O'Shaughnessy strategy, but another strategy I created based on the writings of Peter Lynch. The primary variable used in the Lynch strategy is price-to-earnings relative to growth, the PEG ratio, which measures how much the investor is paying for growth given the stock's current price. The PEG cannot be more than 1.0 for a stock to earn this strategy's recommendation, and Dollar General's PEG is 0.92.
Any way you look at it, Dollar General is a well-priced stock.
Now's a good time to think about Dollar Tree and Dollar General, not only as investments, but as places to buy your needed stocking stuffers.