I'm Marching Right to Dollar General

DG falls into the category of a hated stock that is almost certain to regain its former popularity with investors.

Author:
Paul Price
Publish date:
Sep 7, 2023 7:00 AM EDT

One of the surest and most rewarding ways to make money in the market is buying outstanding growth companies when they are temporarily out of favor.

It was long ago that Meta Platforms (META) , Alphabet (GOOGL) , Netflix (NFLX) and Nvidia (NVDA) were offered at huge discounts to where they now trade.

All of them were down big before resuming their dramatic ascents.

Institutional favorites like those almost always recover brilliantly, if the conditions that drove them lower, whether company-specific or market-related, recovery toward normal. Buying when they we unloved was hard to do psychologically, due to horrible momentum, but paid off big.

Dollar General (DG) now falls into the category of a hated stock that is almost certain to regain its former popularity with investors.

Just before its latest negative quarterly report DG showed outstanding metrics as shown below. Its financial strength, long-term stock price stability and earnings predictability are still intact. A plunge from its 2023 year-to-date peak of $251 to a current quote of under $128 appears to more than compensate for its temporary bad news.

Over the past six years all major metrics have risen solidly. Per share sales, cash flow and dividends all more than doubled. If only the reduced mid-point of management's fiscal 2023 earnings per share guidance is reached profits will still have grown by almost 70%.

What is DG worth?

The company earned over $10 per share during each year from 2020 through 2022. Shareholders got annual chances to sell between $225 and $262 during each of the four calendar years since 2020.

A typical price-to-earnings ran about 19.5-times, accompanied by about 0.97% in current yield.

DG now sells for only 14.3-times its already tempered fiscal 2024 estimate, while paying almost double its typical yield. It hasn't been available at that low a price since the very darkest days of 2020's Covid panic.

A rebound to a more normalized valuation on next year's projected data suggests an end of Jan. 2025 target price of at least $174. Reaching that very modest goal would deliver about 40% in total return over the coming 16-months.

Note, too, that that target is far from an upper limit based on DG's prior trading history. Dollar General topped out at $167 back in 2019 on what would be final EPS of only $6.64.

Yahoo Finance takes a very conservative view in calling for DG to reach $155.04 by this time next summer. Hitting even that low-ball projection would still deliver solid total return.

FAST Graph's research is more in line with my own thoughts. It calls a normalized P/E for DG as 20.23-times. Reverting towards that valuation could send DG up to $170 or so by Jan. 31, 2025.

Independent research from Morningstar is slightly more bullish on DG than that. It sees present-day, as opposed to future, fair value for Dollar General as $179.

If DG dips to below $125.30 it will qualify for Morningstar's highest, 5-star, buy rating.

The bottom half of DG's Morningstar data chart (above) shows that the company's price to fair value relationship is now at its most favorable level in more than a full decade. The previous four, somewhat less attractive P/FV nadirs, each proved to be excellent long-term entry points.

Option-savvy traders can play DG with a bit less risk, but with limited upside, by shorting naked puts out to Jan. 17, 2025. Actual pricing on its $130 - $150 strike price LEAP puts is shown below, with DG at $127.91.

Worst-case, forced purchase prices dropped to between $112.80 and $121.60 providing margins of safety running from 4.9% to 11.8% of the trade inception price.

Future stock market action can never be guaranteed. That said, owning DG at any of the "if exercised" net purchase prices would have been a winning position 100% of time dating back to before the middle of 2020.