Don’t Overlook Dollar General (NYSE: DG) Shares

Monday, December 28, 2020 | Nick Vasco
Don’t Overlook Dollar General (NYSE: DG) Shares

You’ve heard about pandemic winners nonstop since the spring. Wayfair (NYSE: W), Zoom (NASDAQ: ZM), Peloton (NASDAQ: PTON), etc. Most of the chatter has focused on the “sexy” names. Cutting-edge companies that are growing at triple-digit clips – but also trading at triple-digit valuations. You should certainly consider allocating some of your funds to those companies – they’ve created small fortunes this year. At the same time, you don’t want to overlook the less-sexy value plays that are still out there.

Dollar General (NYSE: DG) is one to pay attention to.

Comp Growth + Expansion is Recipe for Success

Money has been tight for many people since the onset of the pandemic, particularly lower-income families. Dollar General is concentrated in rural areas and most of its items sell for around $5-10, so it is well positioned to serve cash-strapped customers. The discount retailer has recorded double-digit comp growth in each of the first three quarters of 2020; 21.7% in Q1, 18.8% in Q2, and 12.2% in Q3.

Dollar General currently has over 17,000 stores in the US, but the company is looking to expand. On the Q3 earnings call, management said, “For fiscal 2021, we plan to execute 2,900 real estate projects in total including 1,050 new stores, 1,750 remodels and 100 store relocations.” The 1,050 new stores would equate to 6.2% growth in total stores.

A New Store Concept

Around 30 of Dollar General’s 1,050 new stores will be “popshelf” stores, a new concept for the discount retailer. The popshelf stores will be built in suburban areas and target more affluent customers, allowing Dollar General to serve a new demographic.

The product mix will also be different; oopshelf stores will skew more towards home decor and entertainment goods and less towards consumer staples. That said, 95% of the items in the stores will sell for $5 or less, so Dollar General is still sticking to what it does best: value.

Dollar General is taking a smart approach here. Instead of immediately committing to hundreds of popshelf stores, the discount retailer is slowly moving into uncharted territory. If the popshelf stores are a huge success, then Dollar General can pick up the pace in 2022. If they don’t work out so well? They can abandon the concept at a minimal loss – or at the very least, take a pause and figure out what’s wrong. Based on Dollar General’s track record, however, the new concept has a great chance of working out.

The Value is There

All things considered, it would be easy to justify a high 20s or low 30s forward P/E ratio for Dollar General. In reality, shares are changing hands at a 19.9 P/E ratio.

Dollar General is not only seeing strong comp growth – it is also having a lot of success on the bottom line. On the Q3 call, management pointed to a “significant operating margin expansion, which contributed to third quarter diluted EPS of $2.31, an increase of 63% over the prior year.”

EPS growth obviously can’t continue to outpace comp growth by such a high multiple in the long run, but it just goes to show that Dollar General’s management knows how to drive profitability.

The Street Loves Dollar General

As it stands, 18 of the 22 Dollar General analyst ratings are either “buy” or “strong buy.” But the average price target of $225.26 is just 6.62% higher than the current share price.

The Street already has a favorable opinion of Dollar General. Couple that with the strong value proposition, and it’s easy to see raised price targets in the discount retailer’s future.

How Should You Play Dollar General?

Dollar General shares haven’t moved much over the past three months. Since the beginning of October, shares have been rangebound between around $205 and $225. Over that span, the day with the highest volatility was when the Pfizer (NYSE: PFE) vaccine news came out. But even then, the 15-point difference between the day’s high and low wasn’t much of a move for a $200+ stock – particularly in the face of game-changing news.

All of this to say: Dollar General is a low-beta play. The market has had an incredible 9+ months, but anything is possible in 2021.

Dollar General offers the potential for solid long-term appreciation, with a low risk of sizeable losses. Consider accumulating shares near support in the low $200s.

Featured Article: How is Preferred Stock Different from Common Stock?



7 Internet of Things Stocks That Are a Perfect Fit to Our Connected Future

When you say the Internet of Things (IoT) you may get different responses. I like to think of it broadly as being about connection. It’s about devices that can connect with each other, and with the internet. And this provides users with the solutions that are making our lives more convenient.

The most basic, and ubiquitous, example of an IoT device is the smartphone that many of us have with us at all times. But think about what that has led to. Home assistants, security cameras, fitness apps, and so much more are all enabled by the internet of things.

IoT took on even more importance in the pandemic as businesses had to find a way to ensure the security and viability of their networks even as their employees were scattered remotely. This created demand for edge and cloud computing solutions that are also facilitated by the internet of things.

And yes, this is just the start. The need for more and more data is powering demand for IoT solution in areas such as autonomous vehicles.

But the good news is that this is an area that is still very much in its growth phase. And that means there is no lack of companies that you can find to trade in this sector. To help you get started, we’ve put together this special presentation that highlights seven such companies and the reasons why we believe they merit adding to your portfolio.

View the "7 Internet of Things Stocks That Are a Perfect Fit to Our Connected Future".


Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Dollar General (DG)2.2$216.41+1.3%0.78%21.45Buy$231.26
Pfizer (PFE)2.3$37.57+1.1%4.15%24.24Hold$38.57
Wayfair (W)1.5$321.85-0.4%N/A-46.11Hold$296.17
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