If You Buy This Stock Now, You'll Be Stuck Shopping at Dollar Stores

People shop at dollar stores like Dollar General and Dollar Tree to get bargains. Both firms have done well as companies, and as stocks over the long-term. I am writing about DG today as a courtesy to a Real Money Pro subscriber who asked for my opinion on it at today's quote. DG's major business metrics could not be much better. It rates highly across the board. If the shares were more reasonably priced they would be attractive to own. High-quality stocks at less than great valuations should be placed on your back burner list of things to consider buying on any major market selloff, which often takes even the best stocks and marks them down along with everything else. Why is Dollar General somewhat overpriced? The 10-year growth table below provides the answer. If Dollar General hits analyst expectations for fiscal 2023, which ends Feb. 2, 2024, its fundamentals will have advanced by more than 237% in term of per share sales, cash flow and earnings over the previous decade. Book value grew less robustly due to major share buybacks at premiums to book value. That goosed EPS, but crimped the growth rate in net equity per share. What gives me pause in terms of buying/holding today is that 10-year total return far exceeded DG's fine growth. That is exactly the opposite of what I most like to see. Shares that fail to reflect previous growth are poised to see catch-up moves higher to arbitrage away the value discrepancy. Shares that outpace previous growth are typically destined to show stock price stagnation or declines as overenthusiasm is gradually replaced by a regression-to-the-mean valuation. What is DG worth? Since 2013 an average P/E ran about 18.8-times, accompanied by about 1.04% in yield (cash dividends were initiated in 2015). All nine of DG's best entry points (green-starred below) saw rallies launch from below average P/Es. Conversely, all three of Dollar General's should have sold moments (red-starred) occurred when DG sold for elevated multiples. DG hit its highest valuation in recent history during April of 2022 when the shares touched $262.20 and fetched 24.6-times forward earnings. DG has never seen that record peak since. In fact, it dropped 23.1% from that early 2022 peak to its 2023 YTD low of $201.30. If DG simply returns to an average multiple of 18.8-times a 12-month target of $210.56 would be in effect even if EPS hit a new record of $11.20. Add an extra year to that equation and about $235 seems an appropriate target over the next 18 - 24-months. Buying DG at about $223 does not appear particularly promising. Yahoo Finance is in general agreement. It calls the shares near fair value right now. Yahoo's year-ahead goal of $241.31 appears a bit optimistic as it assumes DG will command 21.5-times its fiscal 2023 estimate, rather than its normalized 18.8-times price-to-earnings. Research house Morningstar is in near perfect harmony with my own view. It sees the stock's present-day fair value as $212. That suggest about 5% of downside risk is in order. No matter how you slice and dice DG's numbers, it is hard to make a solid case for serious upside over the next 12 - 18 months. The 1.07% current yield does not provide enough income to negate the idea that funds invested in DG are likely to be dead money for the foreseeable future. Other major retailers like Walmart and Target appear to be in the same boat. Avoiding non-bargain shares keeps your precious un-invested capital available for taking positions in clearly undervalued stocks. If you own DG consider selling. If you were thinking about buying it, think again until it drops into underpriced status. There have been numerous chances to own DG at much lower valuations previously. Those opportunities are sure to come again. Disclosure: No positions in any stocks mentioned.

If You Buy This Stock Now, You'll Be Stuck Shopping at Dollar Stores

... Because you'll lose money. Here's why I would avoid Dollar General right now.

Columnist Conversation

AAP Podcast: This Company Is Not Going 'Solo'

This Weekend on Real Money

AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.