As market voices begin to ponder the possibility of pullbacks and even whispers of a recession, discount stores such as Dollar General (DG) could stand to gain from the pain.
Shares of Dollar General are falling fast on Tuesday, having dipped by nearly double-digits at their afternoon lows. The stock has been battered without the buoy of lessening trade concerns that helped its key competitor Dollar Tree (DLTR) rise earlier, as the tariff reversal that bolstered its gains has begun to come in question.
However, if choppier conditions persist and Dollar General is already priced for tariff pressures, a soured start to 2019 could be much to the benefit of investors eyeing this specific retail segment.
"We see a favorable skew of macro outcomes, with DG likely benefitting in a recession scenario, while also likely to grow and gain share should a low-growth consumer environment continue," Morgan Stanley analyst Vincent Sinisi wrote in his take on the earnings release.
The thesis gets only stronger into a possible recession scenario, which Stifel's chief equity strategist Barry Bannister told Real Money is on its way in 2020 given diminishing equity risk premium and an inverted yield curve.
He added that he maintains a bearish outlook for 2019, suggesting investors be selective and defensive into the new year.
Morgan Stanley's Sinisi explained that such pain in the overall economy would drive more middle and upper class consumers to dollar stores.
He added that Dollar General has a distinct advantage of Dollar Tree given it maintains half of the debt load that Dollar Tree is burdened by after its acquisition Family Dollar. That debt burden could only be worsened by rising interest rates and a tighter macroeconomic picture that Stifel's Bannister envisions.
Sinisi maintained a "Buy" rating for Dollar General stock and offered a $115 price target, much above the current pullback.
The competitive strength and backdrop for lower income consumers headed into the new year is also encouraging for Wall Street stock-followers.
The analyst consensus remains a "Buy" with a consensus price target of $116.27 amid the choppier background.
To be sure, competition remains from Dollar Tree and other discount retail giants offering similar products, including Walmart (WMT)
Still, the company's reduced below-industry-norm exposure to China, its relatively low debt level, and its insulation from digital threats such as Amazon (AMZN) make it an interesting play for market pessimists heading into 2019.