The Motley Fool

Is Dollarama (TSX:DOL) Stock on the Verge of a Big Breakout to $70?

Image source: Getty Images

Last week, I’d suggested that investors buy Dollarama (TSX:DOL) stock before it pulled the curtain on its earnings results. Analyst expectations were a tad too low, and the company was holding its own remarkably well through this pandemic-plagued year.

Dollarama stock: Coming in hot!

“Dollarama’s Q3 earnings are on tap for the morning of December 9. Amid the second wave of coronavirus cases, essential discount retailers like Dollarama are likely to see more of the same: less foot traffic and larger basket sizes. The net result should be muted, but with modest analyst expectations going into the quarter, I’d say now is the time to be a buyer before earnings growth numbers have a chance to soar coming out of this pandemic,” I wrote. “Dollarama stock, like the product it sells, is cheap heading into earnings. And I think the stock could break out on next week’s earnings results.”

Fast forward to today, and Dollarama is coming off an impressive earnings beat, which gave a nice 3% lift to shares. The third-quarter results were stellar, but the reaction, I believe, remains muted, as shares of DOL are now testing its long-term level of resistance at around $55.

The roller-coaster ride of a stock had failed to break through back in the summer of 2019. This time around, I don’t think shares will be looking back, as the company looks to be in a position to hold its own amid this worsening second wave to come out strong on the other end of this pandemic.

Dollarama: A solid third-quarter and a positive but muted reaction

The company delivered a handsome earnings beat, clocking in $0.52 in adjusted EPS, beating the consensus estimate of $0.44. As I predicted in my earnings preview, Dollarama witnessed concentrated shopping trips, with less foot traffic and much larger basket sizes to reduce the risk of contracting the deadly COVID-19.

Strong same-store sales (SSS) comps suggested Dollarama was taking share in the quarter. Moreover, margins also took a turn for the better, likely on the back of recent strength in the Canadian dollar versus the greenback. But let’s not discount management’s terrific cost controls amid profound COVID-19 disruptions. The company knew what it was up against after having battened down the hatches through the worst of the first COVID-19 wave earlier in the year. That’s a major reason I was confident enough to recommend that investors buy Dollarama stock right before it pulled the curtain on its earnings results.

Can the stock finally break out to new all-time highs?

Dollarama faces another two to three quarters of COVID-dampened numbers. Once COVID-19 is conquered, the company will probably be firing on all cylinders and will return to the growth track with Dollarcity. And with some loonie bulls thinking that the Canadian dollar could have more room to climb versus the U.S. greenback, Dollarama will continue to find the currency wind to its back.

Given the promising trajectory the lies ahead, I wouldn’t at all be surprised to see Dollarama stock go on a sustained rally to $70 by early 2021. If you seek defensive growth at a reasonable price, I’d look to the name before shares have a chance to breakout.

Speaking of decent value, check out these businesses curated by the team here at the Motley Fool Canada!

Looking for the Next Potential Netflix? We’ve Got You Covered with These 3 Free Stock Picks

Motley Fool Canada's market-beating team has just released a new FREE report that gives our three recommendations for the Next Gen Revolution.
Click on the link below for our stock recommendations that we believe could battle Netflix for entertainment dominance.

Click Here to Get Your Free Report 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 Joey Frenette has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.