It’s Time to Buy This Once Overvalued Stock

A nice entry point to claim your stake
In the interest of fairness, though my suggestion was on target, my timing was off — the group’s peak and subsequent pullback didn’t start until June. But, it did happen — in spades. Dollar General fell 18% between its high and low during the middle of the year, while Family Dollar shares gave up a little more than 17% of their value between June and September. These moves certainly burned off a great deal of any overbought pressure, but they haven’t burned enough off to merit an entry into either stock yet.

Dollar Tree, however, has completely cleared its decks with a whopping 33% pullback that didn’t end until earlier this month. With all the would-be sellers likely shaken out already, this stock’s chart has an enormous amount of room to continue this rally.

That being said, this isn’t a purely-technical investment idea. Although Dollar Tree shares have more room than Family Dollar or Dollar General have before resistance kicks in, the stock is supported by a solid fundamental argument, too. It’s the cheapest of the three stocks in question on a trailing P/E basis, and after 15 earnings beats in a row, that projected P/E ratio of 14.6 may well underestimate the company.

Risks to consider: Ironically, the one thing that could trip up any of these three stocks is a firm rebound in the economy. If spending preferences return to higher-priced goods, then these retailers won’t exactlyoffer what the average consumer wants these days. Also, bear in mind that none of these stocks will be able to grow in the future as rapidly as they have during the past three years.

Action to Take –> While the deep-discount space continues to be rewarding for all of its key companies, make no mistake — Dollar Tree is the stock to step into if you’re looking to stake a claim now. A 20% gain from current prices could be realized in the very foreseeable future. But, given 2011’s romp, a 40% reward could be in the works for investors willing to stick with it for a full year or so.

This article was originally written by James Brumley, and posted on StreetAuthority.