This 2018 Dud Could Become the “it” Stock of 2019

Dollarama Inc. (TSX:DOL) was a huge loser in 2018, but it could be among the biggest winners in 2019!

| More on:
win

Dollarama (TSX:DOL) was one of the biggest losers of 2018 with shares falling a whopping 38% for the year. With shares now off 44% from peak levels, contrarians may want to consider picking up the dud now that the bar (and valuation) has been lowered substantially.

For many Foolish followers, Dollarama’s violent decline shouldn’t have come as a surprise.

Last year, I’d warned investors that the stock was severely overvalued and that management’s decision to repurchase shares would come back to haunt them. At the time, Dollarama shares traded at over 36 times trailing earnings, with what I thought were overly ambitious and incredibly unrealistic growth expectations baked into the stock in spite of a handful of concerns that I thought were apparent on many levels.

In November, I’d doubled-down on my bearish stance after short-sellers at Spruce Point Capital Management called an already battered Dollarama a “broken growth story” that could tumble by another 40%. I also shed light on the fact that Amazon.com had begun barging into Dollarama’s turf with its low-cost “add-on” items that were once thought of as uneconomical to sell via an e-commerce platform.

“Discount stores like Dollarama which were once thought of as Amazon-proof may not be as insulated as many investors may have thought a few years back.” I’d said in a prior piece. “Dollarama’s moat was its ability to command low prices, but with Amazon breathing down its neck with low-cost ‘add-on’ items, Dollarama’s margins will stand to be pressured, and its moat could easily erode because, as well all know, Amazon plays hardball when it comes to price undercutting.”

Add the entrance of other Canadian discount retailers (like Miniso) into the equation, and Dollarama still seemed expensive, even after the stock lost over 30% of its value.

What has me changing my stance all of a sudden?

Dollarama has fallen off a cliff, no doubt, but it’s still priced as a growth stock at 19.5 times trailing earnings (14.5 times next year’s expected earnings). Although the quarter that sent Dollarama off a cliff showed weakness across the board, marking the potential start of a sustained downtrend for comps, there’s still hope for management to compete in a now more competitive environment.

Dollarama has over 1,000 stores across the country, and it’s this deep country-wide penetration that serves as Dollarama’s strength. As I’ve mentioned in prior pieces, management needs to roll up its sleeves and focus at the individual store level to bolster comps with “experiential” initiatives to draw in consumers.

You can have all the best deals in the world, but if you’ve got a cluttered mess of a store, you’re going to deter folks from entering it, especially millennials, who are all about the experience factor. Dollarama’s bargains are sexy, but its store layout? Not so much. Most millennials would be willing to pay up for a sexier in-store experience, rather than getting lost in the narrow, messy, and unorganized aisles at Dollarama.

I was a huge fan of management’s decision to put its nose to the grindstone with its online store that’s being piloted in the province of Quebec. It showed that management isn’t willing to wait around for the macro picture to change and their willingness to put their nose to the grindstone to turn the “broken growth story” around.

As management continues to pursue comps-driving initiatives, I’d say that the stock could be close to a bottom with tremendous upside over the next year and beyond.

Stay hungry. Stay Foolish.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Joey Frenette has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

More on Investing

Growth from coins
Dividend Stocks

1 Dividend-Growth Stock to Buy and Hold for the Next 15 Years

CN Rail (TSX:CNR) is a dividend-growth giant worth buying on weakness in July.

Read more »

analyze data
Dividend Stocks

The 5.11% Dividend Stock Set to Dominate the TSX

Brookfield Infrastructure (TSX:BIP.UN) has already been dominating the TSX, but more is certainly on the way.

Read more »

stock analysis
Investing

3 TSX Stocks You Can Confidently Buy Now and Hold Forever

These three companies are some of the top stocks on the TSX, giving you the confidence to buy now and…

Read more »

sale discount best price
Dividend Stocks

3 Remarkably Cheap TSX Stocks to Buy Right Now

Investing in undervalued TSX stocks such as Eldorado Gold should help Canadians derive steady gains in 2024 and beyond.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Retirement

2 Magnificent Dividend Stocks I Plan to Add to My TFSA in August

Here are two magnificent dividend stocks long-term investors may certainly want to hone in on before the next bull cycle…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

1 TSX Stock That Could Help Set You Up for Life

Early investors in Intact Financial (TSX:IFC) stock could earn a 17% dividend yield in 2024. Here's how IFC stock could…

Read more »

Canadian Dollars
Dividend Stocks

2 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in July

These two top Canadian dividend stocks offer over 8% annualized dividend yield in July, making them really attractive to buy…

Read more »

Gold bullion on a chart
Metals and Mining Stocks

Gold Price Plummets: 2 Gold Stocks to Keep an Eye On

Stable as it is in the long term, even gold is not immune to price fluctuations and slumps. This is…

Read more »