DG or DLTR?

Investing Strategies Falling Knives
1

Dollar General stock has been struggling lately. Stock has under-performed DLTR by 20% TTM. But DG has massively outperformed DLTR over 3 and 5 year periods.

DG is now priced at a forward PE of 18.4 vs 16.4 for DLTR. Probably worth paying the extra premium for a better managed company with a better balance sheet and superior operational and financial metrics. DLTR still has work to do before the turnaround at FDO is completed or FDO is spun off, as some activists are pressing it to do.

Fears of inflation affecting their customers are probably overblown. Those customers are hardly likely to get a better deal elsewhere, might lower their consumption a tad for a few months.

4 Likes
2

It’s an interesting comparison.

Dollar General is the steady-as-she-goes pick.

Dollar Tree has been my pick for a few years because of the implied upside option.
The big acquisition of Family Dollar offered the potential of serious upside, with not much downside.
So, heads you do OK and tails you do really well. As it turns out, it didn’t really work: the acquisition didn’t really add value.
The pain was acceptable, but the upside didn’t appear. These things happen.
The main effects were that Dollar Tree lost a couple of years of trend growth, and they stayed much cheaper than DG for a couple more years after that.

So, during that second period, Dollar tree again was the one with more upside potential:
it was cheaper, so (potentially) when the one time flat spot wore off it was the one that offered greater returns.
That worked out really well, as it happens. I made a nice bundle on the most recent $90-to-$140 swing.

The interesting question is: now that things have returned to normal, relatively speaking, and they are both firing on almost all cylinders,
which one has the better prospects going forward, as always considering relative valuation?
Is DG still worth the premium that it commands? Frankly, beats me.
It probably requires a deeper analysis than I can offer, involving the relative merits of their average location profiles, among other things.

Personally, I’m a frequent swing trader on these folks.
They tend to trade in a wide range any given year.
When they’re unusually cheap I load up, and when they’re not I take some profits.
At the moment I have a very small position in Dollar Tree and no Dollar General.
I’m definitely not recommending that, but it’s what I have.

They’re both great businesses.
They both make vast quantities of free cash money in good times and bad, and never have bad receivables.
Good entry points arrive almost every year for both, especially DLTR, and they are both well suited to a very long term position.
What more does a fella want?
The DLTR price is up about 12%/year in the last decade and that seems pretty likely to continue for a good while yet.
Especially if the entry and exit points are judiciously chosen: as mentioned, every year seems to offer both good and bad pricing levels.

Jim

15 Likes
3

Something to consider is that DLTR recently raised prices by 25% on a great deal of items it sells. Will this hurt volume sold? I don’t know, but if not, it could be a considerable boost to the bottom line.

Don

1 Like