Dollar Store Stocks and a Weak Economy

By Chloe Lutts

One of Today’s Strongest Stocks

Frugal Consumers

The Dollar Store Stocks

One stock that’s been popping up in a lot of newsletters recently is Dollar Tree (DLTR), a leading discount retailer. It’s not hard to see why; the stock just hit a new 52-week high, at a time when many other stocks are well off their peaks.

The story here is simple: Dollar Tree owns and operates 4,101 discount stores with a wide variety of very cheap products, many priced at or around $1. According to an August 18 New York Times article, in the wake of the recession, these super discount stores are gaining newly frugal customers of all incomes. From the article:

“While it’s true that low-wage earners still make up the core of dollar-store customers (42% earn $30,000 or less), what has turned this sector into a nearly recession-proof corner of the economy is a new customer base. ‘What’s driving the growth,’ says James Russo, a vice president with the Nielsen Company, a consumer survey firm, ‘is affluent households.'”

That argument is corroborated by the leading dollar store chains’ recent earnings reports. Dollar Tree reported a 4.7% increase in same store sales for the latest quarter, and earnings rose 26%, to 77 cents per share, beating estimates by two cents. Same-store sales were up 5.9% at Dollar General (DG), the largest chain with 9,414 stores, which also reported record earnings. DG also hit a new 52-week high just last week.

So it’s no surprise that these stocks–along with the other major discount chain, Family Dollar (FDO)—are favorites on Wall Street today. Dollar Tree has been the most popular by far. Two different analysts recommended it in the August 31 issue of Dick Davis Investment Digest. Louis Navellier, editor of Blue Chip Growth Letter, wrote:

“Dollar Tree’s success lies in its tremendous bargaining power with its suppliers; it can get a wide variety of practical items for unbeatable prices. And Dollar Tree has recently expanded its reach by launching a shopping website where customers can get products shipped to the nearest store or to their doorstep. As the company knows, one of the best ways of coping with thinning wallets is to stretch each and every dollar. So, while lean times hit other retailers particularly hard, Dollar Tree stores flourish! Sales for the second quarter jumped 12%, net income spiked 22% and earnings rose 26% per share over last year. Now is the perfect time to add DLTR. So, scoop up shares of this conservative stock under $69.”

Eric Dany, editor of The Stock Prospector, already had Dollar Tree in his newsletter’s portfolio, but reiterated his Buy rating in a second opinion on the stock:

“The discount variety store is holding up well and will continue to do well even if the economy weakens. My target price is $80.00 a share. Interestingly, Warren Buffet recently added shares of competitor, Dollar General (DG), to Berkshire Hathaway’s portfolio. Good defensive position–Buy!”

Dollar Tree has also been recommended in recent weeks by Canaccord Genuity, Investor’s Intelligence and Cabot Top Ten Trader. It’s also in the portfolios of the Cabot Benjamin Graham Value Letter, where it is above its maximum buy price but has a minimum sell price of 82.29, and The Chartist, which purchased it back in April 2009 and is still holding tight.

Dollar General is the larger company, but the stock has been getting less attention. It was recommended in The Lancz Letter back in March 2011, and editor Allan Lancz recently recommended taking partial profits, but reiterated that the stock is still strong. Investor’s Intelligence has DG rated buy. Plus, Warren Buffet likes it.

Finally, Family Dollar is the weakest of the three, technically, but is still holding up well versus the market. It also pays an 18-cent dividend every quarter, for a 1.4% yield. Family Dollar was recommended in September 16 Investor’s Digest of Canada, by Carlyle Dunbar. He wrote:

“As far back as 2008, I analyzed Family Dollar, as well as similar neighborhood store chains. These outfits are navigating the business slowdown better than discount leader Wal-Mart Stores (WMT)–perhaps because these chains have much smaller stores, as well as a closer neighborhood focus. Because of its strong balance sheet, margins and growth, as well as its dividend record, Family Dollar was an easy choice. It traded between $15 and $30 a share in 2008, paying a dividend of $0.50. It now pays $0.22 more. And although its yield, at 1.4%, is certainly low, so is its P/E ratio, which is 17. Family Dollar, which has traded as high as $56 a share this year, is again now attractive at its current price. Its earnings and dividend growth earn it an A+ rating from Standard & Poor’s. Family Dollar’s dividend is well supported; over the past four quarters, its free cash flow has covered the dividend 2.6 times. Meanwhile, revenue is flowing in, given that sales in the current fiscal year are 6.4% above where they were in fiscal 2010.”

Carlyle also gives brief consideration to Family Dollar’s competitors, and notes Dollar General’s high debt levels and Dollar Tree’s P/E ratio of 21 as strikes against them. The choice, though, is yours. All three companies are seeing excellent sales growth, and the sector certainly has the attention of investors.

To get more information on top stocks, like those mentioned above, check out Dick Davis Investment Digest. I comb through hundreds of stock recommendations from the top minds on Wall Street twice each month to bring you only the very best picks. Get the latest issue today when you click here to learn more!

Wishing you success in your investing and beyond,

Chloe Lutts
Editor of Investment of the Week



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