Is Dollarama Stock a Buy?

Dollarama stock has gained more than 20% so far year to date, but is it still worth a buy with a potential recession on the horizon?

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Although tonnes of stocks in Canada have lost value this year or, at best, been trading flat, it’s impressive that Dollarama (TSX:DOL) stock continues to perform well, up more than 20% so far this year.

For comparison, the TSX is up just 1.6% on the year as higher interest rates continue to impact the valuation of stocks.

Higher interest rates hurt most stocks for three reasons. They impact consumers’ budgets, which translates to lower sales for many companies, especially those selling discretionary goods.

In addition, it also makes it more expensive for companies to service their debt, which impacts profitability.

Finally, higher interest rates make other investments, such as bonds, more attractive, hurting the demand for stocks in the near term and often causing them to lose value.

In the case of Dollarama stock, though, this economic environment actually provides a significant boost to the stock. This has been apparent over the last year and a half as both higher inflation and higher interest rates have impacted the Canadian consumer considerably. However, this is also a trend we’ve seen in the past.

So, although Dollarama stock is trading just off its all-time high, it’s natural to wonder if Dollarama stock is worth buying today.

Is this impressive discount retailer worth buying today?

As is always the case when looking to buy stocks for your portfolio, whether or not Dollarama is worth buying depends on both your current portfolio makeup as well as your investment goals and risk tolerance. What makes sense for other investors may not make sense for you, and vice versa.

The great thing about Dollarama stock, though, is that it’s such a high-quality business and has both defensive and growth stock qualities that it will make sense for many investors’ portfolios.

As we already discussed, unlike other companies that will see lower revenue, lower net income, or both in these environments, Dollarama can actually see a significant boost to its business.

For example, over the last seven quarters, as the economic environment has worsened, Dollarama’s year-over-year revenue growth has exceeded 11%. And in the last five quarters, it’s been at least 14.9% each quarter.

However, even though it sees such significant growth during weakening economic environments, it doesn’t mean that it can’t grow its operations when the economy is strong. As you can imagine, there’s never a shortage of consumer demand for discounted goods.

In fact, over the last decade, Dollarama stock hasn’t had a single quarter where it didn’t grow its revenue year over year, and only four of the 40 quarters did its gross profit decline year over year.

So, considering that Dollarama is such an impressive long-term growth stock, yet it can also benefit from and add resiliency to your portfolio during economic slowdowns, it’s certainly a stock that most Canadian investors should consider adding to their portfolio and holding for years to come.

However, although Dollarama stock is worth buying for the long haul, whether it’s worth buying today, at its all-time high, is another question.

Is Dollarama stock overvalued?

Although Dollarama is certainly not undervalued, when looking at its valuation, it’s not necessarily overvalued either.

Sure, you aren’t buying the stock at a discount like many other stocks on the market today. However, that’s because Dollarama has proven it can provide investors with growth in this environment while the cheapest stocks on the market are being significantly impacted.

So, although Dollarama’s stock has continued to gain ground this year, up more than 20% so far, it’s worth noting that it’s essentially growing alongside its increasing earnings, which are also up more than 20% over the last year.

To get a better idea of how it’s valued, Dollarama stock is trading at a forward price-to-earnings (P/E) ratio of roughly 26.6 times. And in the past year, the stock hasn’t traded higher than 28.8 times its forward earnings or below 25.0 times.

Furthermore, Dollarama’s five-year average forward P/E ratio is 24.8 times, showing that Dollarama is only trading slightly higher than its historical average at a time when it’s growing significantly faster than its historical average.

Therefore, even with Dollarama trading just off its all-time high, with its impressive potential in both the short and long term, it’s certainly worth buying 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 Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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