It’s Time to Buy This Once Overvalued Stock

Page 1 of 2

It's Time to Buy This Once Overvalued StockThey say timing is everything, particularly when it comes to stock investment. I don’t disagree. That’s why I recommended caution with most of the major super-discount retail stocks back in April — it just wasn’t the right time to take on a new position in any of those stocks.

A lot can change in eight months though.

And it has at least for one of these discount retailers. Thanks to some more encouraging clarity on the earnings front combined with a big release of the technical tension its chart had brewed up, this stock is now a compelling buy.

Insanely overvalued in a recent past
It’s no real secret that dollar stores such as Family Dollar Stores, Inc. (NYSE:FDO), Dollar Tree, Inc. (NASDAQ:DLTR), and Dollar General Corp. (NYSE:DG) have been on a roll since the GreatRecession. Consumers are still feeling pinched and in need of real value for their dollars. Retailers that can give shoppers the most bang for their buck stand to win plenty of new business, and these three stores have sure done so.

This isn’t just a theoretical benefit either. As I reported in April, since 2008, Family Dollar has managed to grow its bottom line at an average annual pace of 23%. Dollar Tree’s income has grown an average of 31% annually since 2008. Dollar General’s bottom line growth has reached triple-digit proportions during the past three years, and even though it started to slow last fiscal year, that’s largely because it was running out of viable places to plant its flag.

Take a look at the chart below…

It's Time to Buy This Once Overvalued Stock

That growth is nothing less than phenomenal and investors were right to be impressed. Investors weren’t right, however, to pay an excessive price for that growth — even heavyweight investors like Warren Buffett, who took on a $48 million stake in Dollar General shortly before my April article.

At that time, Dollar Tree shares were sitting on top of a three-year rally that sent the stock soaring 300%. Family Dollar had rallied nearly 200% during the prior four years, while Dollar General shares had doubled in value since late 2009.

The size of the rallies themselves weren’t the problem with these stocks, however. The red flag was simply that these rallies had been a lot stronger than earnings growth, leaving all three stocks at price-to-earnings (P/E) ratios high enough to make even some technology and growth investors a little nervous. Dollar General was trading at 19.5 times trailing earnings in April, while Family Dollar and Dollar Tree were trading at 18.6 and 23.5 respectively.

Yes, many stocks have survived worse overvaluations, but those stocks weren’t from the world of discount retailing either. That’s why I specifically made the point that “the right time and price for an entry is probably going to require about a 25% correction from peak levels.”

And guess what finally happened since then…

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!