Dollarama Inc. (TSX:DOL) has been a huge winner for investors, as the stock returned over 400% in the last five years. The stock has been on a rocky ride this past year, but it still managed to return a modest 8.5%. Does the stock have any serious upside from current levels or is the growth tapering off?
The stock has slowed down in the last few months, and there was even a temporary pullback earlier this year, which would have been a terrific time to jump into the stock. The stock is considered quite expensive at current levels by most value investors. The price-to-earnings multiple is at a hefty 28.48, which is definitely not cheap by any means. What is the reason behind this huge premium, and is it deserving of such a valuation, or is the stock in need of a correction?
There’s no question that Amazon.com Inc. (NASDAQ:AMZN) is hurting almost every retail stock out there, but not all retail businesses are built the same, and not all of them will fall victim to Amazon. Dollarama supplies goods that cost a buck or two; these goods are much needed by consumers, but there’s no way Amazon will make a profit from selling something with shipping that’s multiples more than the actual item. In this regard, Dollarama is resistant to Amazon’s disruption in the retail space.
If you thought the company was overvalued based on the price-to-earnings multiple, then you’ll find it absolutely ridiculous that the price-to-book multiple is at a whopping 45.2. You read that right! The stock has fantastic growth potential, and it isn’t close to saturating the market, but the valuation at current levels simply doesn’t make sense.
Dollar stores in the U.S. have better coverage, so growth opportunities may be limited to Canada for the most part. Another reason why the stock is expensive is because the company can be considered recession resistant. If the economy crumbled tomorrow, Dollarama may be one of the very few beneficiaries. People want to save money, and if there’s less of it around, then that means more customers at Dollarama.
Dollarama is a fantastic business; it’s both Amazon resistant and recession resistant. However, the stock is dangerously expensive right now, and I wouldn’t touch it. There could be a major pullback ahead as the stock gains negative momentum, and this pullback may bring Dollarama back to levels where the valuation makes more sense.
Don’t get me wrong, Dollarama is an absolutely fantastic business with great growth potential, but there’s a huge premium involved, and a value investor should always consider the price paid for securities. As the great Warren Buffett used to say, “The price is what you pay; value is what you get.”
