Define "Depressed"

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Feb 17, 2015
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It's not just news anchors that can misrepresent things

Barron’s featured low-end retailer Dollar General (DG, Financial) as a bargain stock this week. Their teaser line said that DG shares are depressed in price.

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Huh? Dollar General closed last week at $68.82. That was up from $26.72 three years ago and $42.14 near the beginning of 2013. The stock bottomed at $53 as recently as last summer.

How, then, can DG be called underloved and neglected?

Columnist Avi Salzman projected that DG can get to $80 or so, representing 20x year ahead expectations of $4.00 (FY 2015 ends Friday near Jan. 29, 2016).

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Is that realistic based on Dollar General’s past trading history? Not really.

DG went private in July of 2007. It came public again on Nov. 13, 2009. The firm has done very well since then, growing EPS from $1.82, in FY 2010, to about $3.50 in the year just completed.

Value seeking investors could buy DG at P/Es ranging from 11.7x to 15.1x forward earnings on four separate occasions during the last five years.

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When the stock heated up to an almost 20 multiple, at $56 in 2012, the shares went down to sideways for two full years even as fundamentals kept improving.

That can be very frustrating on a non-dividend paying stock. The stock’s average P/E over that half-decade? Just 16.5x. Why assume a new higher-than-typical multiple is on tap?

If Dollar General comes through on its estimate but reverts back to its normalized valuation, it would only support a $66, 12-month target.

I’m not alone in that viewpoint. Independent research outfit Morningstar assigns Dollar General a neutral rating while calling fair value as just $63.

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Like DG, rival Dollar Tree (DLTR, Financial) stalled out after its multiple soared from the 10x – 14x range to north of 22x. Dollar Tree also peaked in 2012 before going nowhere for a couple of years. The stock regressed from $56.80 to $49.60 before finally resuming an upward trajectory.

Excitement over its purchasde of Family Dollar (FDO) has sent DLTR back up to what again may be overvalued territory.

DLTR’s average P/E since 2010 is 17.5x. A reversion to normal could see DLTR fall back to the $60 - $65 range even if the company hits its $3.50 estimate for FY 2015.

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DG and DLTR are both well-run companies. They should be higher over the long term. History says, though, that traders who fail to lock in gains at these valuations will need to be patient if they expect to capture any further progress.

Lucky owners of these shares would be advised to sell now with the idea of buying back in later at more favorable prices.

DG is likely to get a "Barron's Bounce" on the opening as readers of its column buy into the high. DG was quoted at $69.49 premarket, as of 8:43 a.m. Don't waste today's chance to get out of Dollar General at a great price.

Disclosure: No positions in DG or DLTR