Stephen Mandel Is Clearing Out The Local Dollar Tree

Billionaire Stephen Mandel’s Lone Pine Capital had not owned any shares of Dollar Tree, Inc. (NASDAQ:DLTR) at the beginning of July. During the third quarter of the year, however, the Tiger Cub’s fund initiated a position in the stock and by the end of September Lone Pine owned 3.9 million shares (see Mandel’s latest stock picks). The hedge fund has apparently kept right on buying and according to a recent 13G owns 11.8 million shares, giving it 5.2% of the total shares outstanding. Dollar Tree wasn’t the only dollar store in Mandel’s portfolio at the end of the third quarter: he and his team reported 8.3 million shares of Dollar General Corp. (NYSE:DG) in their 13F filing. It looks to us like the investment team at Lone Pine feels very optimistic about the industry as a whole.

In the fiscal quarter ending in October- the third of Dollar Tree’s fiscal year- revenue rose 8% compared to the same period in the previous fiscal year. Comparable net sales were up 1.6%, as much of the company’s growth came from an increase in store count. Still, Dollar Tree reported a remarkable 49% increase in earnings; we would say that it’s able to control costs even as it opens more locations, and with margins actually increasing it doesn’t appear to have achieved maximum market penetration yet.

Dollar Tree, interestingly, is actually down 4% in the last year as sentiment towards dollar stores has cooled. It’s certainly possible that an increase in consumer confidence and spending will drive customers towards higher-priced retail, but the combination of growth and a falling stock price has left the stock at only 16 times trailing earnings. It wouldn’t take much more growth for the company to justify that figure, and Dollar Tree could certainly be a good value even if its net income begins growing much more slowly. In addition, as a dollar store Dollar Tree doesn’t care much about the state of the overall economy; its beta is 0.2. As a result investors would be somewhat protected from a downside surprise. Another interesting point is that one of the company’s Board members was buying the stock in mid November.

A number of other hedge funds saw an opportunity in Dollar Tree during the third quarter of 2012. Fellow Tiger Cub John Griffin’s Blue Ridge Capital increased its own stake by 21%, and closed September with 4.6 million shares in its portfolio (check out more stocks Griffin was buying). Renaissance Technologies, founded by billionaire Jim Simons, also added shares. Find more stock picks from Renaissance Technologies.