BUY ALERT: Dollarama (TSX:DOL) Could Skyrocket Amid This Recession

Dollarama Inc. (TSX:DOL) had a stellar quarter and is begging to be bought after a modest but still impressive first-quarter earnings beat.

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Dollarama (TSX:DOL) stock was up as high as 4% on Wednesday before finishing the day up 2.5% following the release of some pretty solid quarterly results, beating the Street on the top line ($845 million versus the $840 million consensus).

A solid first-quarter beat for Dollarama

As you’d imagine, during this pandemic, consumers were buying more bare necessities, including grocery items, among other discounted essentials.

The discount retailer was deemed an essential business and was open with limited hours at a majority of the locations I’ve been to amid the coronavirus-induced shutdowns. While many Canadians were social distancing and avoiding the narrow aisles of the local Dollarama if they could help it, it certainly didn’t seem like it when the company’s open stores clocked in same-store sales that were relatively flat (rising 0.7%), with average transaction sizes rising nearly 23%.

Canadians were buying a lot more per visit while visiting less often to minimize the risk of contracting the deadly coronavirus, which, while abating, could exhibit a resurgence in the latter part of the year. The company demonstrated its resilience in the face of an unprecedented crisis and is not only a great play in case we’re hit with a second or perhaps a multitude of shutdowns, but it’s also a top dog as we head deeper into a recession.

Dollarama can remain resilient in a harsh environment

During times of economic hardship, everyone needs every dollar to go as far as it can. And such a harsh economic environment could actually be a boon to Dollarama’s business, which had slowed down considerably prior to the pandemic thanks in part to a lower loonie than ate into margins and sluggish comps growth.

After the post-earnings rally, Dollarama stock trades at 21.5 times next year’s expected earnings, 16.1 times EV/EBITDA, 3.9 times sales, and 20.3 times cash flow, all of which are considerably lower than the stock’s five-year historical average multiples of 22.5, 19.9, 4.4, and 26.1, respectively. Shares of Dollarama are still off 15% from its early 2018 all-time highs, but it looks to be in a position to revisit it, as investors look to pile into “risk-off” plays with all the uncertainties relating to the coronavirus.

Back in May, I’d stated that Dollarama stock was a top candidate to take-off, because of the broader “trend-to-thrift” theme that would accompany the coronavirus recession.

While the company is not without its problems (Dollarama is still resisting the transition from growth darling to stalwart), I’m a massive fan of the name, because the company will do its part to help vulnerable Canadians meet their needs amid the unprecedented rise in unemployment. Not to mention that Dollarama is one of few firms that has a pretty predictable (and reliable) operating cash flow stream, with all the uncertainties relating to this pandemic.

Foolish takeaway

If you’re looking to play defence, Dollarama is a terrific way to do this. The firm has an unmatched value proposition and has a lot to gain, as lockdowns loosen, and the loonie continues strengthening versus the greenback.

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.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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