Should You Add Dollarama to Your Portfolio?

The company’s shares slid on Thursday. Should you take advantage?

| More on:

On Thursday, Dollarama (TSX: DOL) proved that its stock price is in fact capable of going down, something that hasn’t happened very often since the company became public. After reporting earnings for the first quarter of fiscal 2015, investors reacted by sending the company’s shares down nearly 3%. So what happened?

A little light

The company’s results were very strong by almost any standard. Sales increased almost 12% year over year, or 3.3% on a comparable-store basis. The company also opened 25 net new stores, ending the quarter one short of 900, and remains on track for its store growth plans this year. Margins held firm too.

But this is Dollarama, a company trading above $90 per share despite making only $3.47 per diluted share last fiscal year. Investors are used to getting plenty of growth to compensate for that share price premium, and were not completely satisfied in the first quarter. In Dollarama’s defense, the company had to deal with very poor weather this winter, something affecting all retailers.

Buying back shares

For investors committed to holding Dollarama’s shares over the long term, it should be good news that the company’s shares slid today. This is because Dollarama has renewed its Normal Course Issuer Bid, allowing the company to buy back up to 3.5% of its outstanding shares. The lower the share price, the more shares that can be repurchased — over the long run, this will create more value.

So should you add Dollarama to your portfolio?

A 3% slide is not drastic enough to turn an expensive stock into a cheap stock. Dollarama is a perfect example; its shares are still very pricey. To illustrate, over the past 12 months, Dollarama has made $3.63 per diluted share, and with its shares trading at $92.65, its P/E ratio is over 25. Clearly, there is still plenty of optimism over the company’s ability to grow revenue and earnings.

A much safer option at this point would be a retailer like Canadian Tire (TSX: CTC.A), a company that requires little to no growth to justify its stock price. Canadian Tire trades at only 15 times earnings despite owning some very valuable assets, such as its credit card portfolio and real estate, both of which have been monetized recently.

Still, Dollarama has been expensive throughout its life as a public company, and it never seemed to matter. Even when it first became public at less than $20 per share, it was expensive. So if you bought the shares back then, congratulations — there’s no reason to give up on Dollarama today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

grow money, wealth build
Dividend Stocks

3 Stocks That Will Make You Richer in 2024

When it comes to creating riches in 2024, these companies offer the best, most solid chance while providing dividends while…

Read more »

oil and gas pipeline
Dividend Stocks

Is it Too Late to Buy TC Energy Stock?

TC Energy is up 17% in recent months. Are more gains on the way?

Read more »

dividends grow over time
Dividend Stocks

If You Invested $1,000 in goeasy Stock in 2014, This Is How Much You Would Have Today

When it comes to growth, it's hard to beat goeasy (TSX:GSY) stock. But what should investors consider for future growth,…

Read more »

Utility, wind power
Energy Stocks

Brookfield Renewable Partners Stock: Buy, Sell, or Hold?

BEP stock (TSX:BEP.UN) now trades at half its share price back in 2021. So what should investors do with this…

Read more »

Supermarket aisle with empty green shopping cart
Stocks for Beginners

3 Retail Stocks to Buy Hand Over Fist in February

These retail stocks offer huge growth for those getting in now and holding long term, especially after earnings demonstrate their…

Read more »

Value for money
Dividend Stocks

Better Buy in February 2024: Magna Stock vs. BCE Stock

Both Magna stock (TSX:MG) and BCE stock (TSX:BCE) have faced troublesome stock prices of late, but which is offering value?

Read more »

Growing plant shoots on coins
Dividend Stocks

3 No-Brainer Dividend Stocks to Buy With $1,000 Right Now

These three dividend stocks look like an excellent addition to your portfolio.

Read more »

Energy Stocks

2 No-Brainer Energy Stocks to Buy With $5000 Right Now

Cenovus Energy is one of two high quality energy stocks that are undervalued and well-positioned for long-term success.

Read more »