3 Reasons Why Dollarama Stock Is a Buy in May 2023

Dollarama stock has returned nearly 600% in the last decade, beating the TSX Index by a big margin.

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Canadian discount retailer Dollarama (TSX:DOL) stock has notably outperformed broader markets in the short as well as in the long term. In the last 12 months, it has returned 22%, while the TSX Index lost 1%. In the decade gone by, Dollarama stock returned 590%, again beating broader markets by a big leap.

It’s quite a challenging run for the markets so far in 2023. Stocks have rallied, despite increasing recession fears and severe macroeconomic challenges. It seems prudent to say on the safer side and bet on the defensives. Here are three reasons why Dollarama looks like an appealing bet.

Dollarama stock continues to outperform

Dollarama has truly been an all-weather stock that has played well in the bull as well as in bear markets. Its outperformance since late 2021 has been quite noteworthy as many growth names plunged on macroeconomic woes.

DOL stock looks well placed in the current environment even when it is trading at its all-time highs. An expected recession might force market participants toward relatively safer options like Dollarama, ultimately pushing it higher.

Fundamental business strength and stellar financials

Dollarama sells merchandise and other household products at its 1,486 stores across Canada. The store count has been its key competitive advantage over peers. It aims to reach a store count of 2,000 by 2031. There has been a positive correlation between its number of stores and its financial growth. The same has played well for shareholder value all these years.

Dollarama sources its products from low-cost suppliers in countries like China. Its effective supply chain has driven industry-leading operating margins of upwards of 20%. That’s quite a feat considering thin margins in the retail industry and steep competition.   

Many companies saw margins squeeze in the last few quarters due to rising rates and adamant inflation. However, Dollarama has shown admirable margin stability, highlighting its business strength. It also offers a unique value proposition to its customers that should stand particularly winning in this rising cost environment. 

Stock buybacks and valuation

Dollarama regularly buys back its stock as a way to distribute its excess cash among shareholders. It has repurchased 40% of its outstanding shares since 2012, indicating its balance sheet strength and a long-term commitment toward shareholder value.

It is currently trading 30 times its earnings and does not look significantly cheap. Dollarama’s premium valuation indicates investors’ higher growth expectations. Plus, it deserves a premium valuation multiple due to its long-term outperformance and dominating market position.

Investor takeaway

Dollarama will likely keep beating the market due to its earnings growth potential and margin stability. It offers a combination of defensive and growth stocks that will likely stand tall in an impending recession. Dollarama’s stability should play also well in these uncertain markets.

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.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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