Is Dollarama a Buy?

Dollarama (TSX:DOL) stock looks great going into January 2024, as recession fears look to pick up.

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It has been a pretty painful start to 2024, with the broader stock markets sinking (S&P 500 down 0.57% while the TSX Index sagged 0.4%) lower on the first trading of the year. A bad first day or week to 2024 does not mean that the rest of 2024 will entail painful losses, however. Given how hot stocks have been since bottoming out back in October, I’d argue that a market pullback is exactly what this market needs to strengthen the legs of the bull.

Additionally, TFSA (Tax-Free Savings Account) investors should be grateful for the first-day plunge, as it could grant us an opportunity to get more from our 2024 TFSA contribution. For this year, it’s pinned at $7,000. And if stocks are bound to retreat further on the month, it may be wise to look for bargains amid the wreckage with one’s TFSA funds.

Dollarama stock takes a subtle hit on the first trading day of 2024

On a painful day of trading, Dollarama (TSX:DOL) stock slipped around 0.5%. With shares down around 5% from their all-time highs, just shy of $101 per share, I’d argue Dollarama remains an attractive momentum pick for investors looking to cruise right through a potential Canadian recession.

Indeed, we’ve heard non-stop chatter about a coming recession for years now. It’s still yet to present its ugly head. And as central banks, like the Bank of Canada, begin slashing rates in response to falling inflation and subtle economic softness, there’s a good chance that the stock market may be able to sail higher, perhaps with a bit of turbulence.

Arguably, the discount retail scene seems like a great place to put new money to work. Though inflation has come off quite a bit from peak levels, consumer pressures could remain, especially if employment takes a bit of a breather after staying relatively robust for several quarters. And, of course, there’s the rise of generative artificial intelligence (AI), which may have unexpected negative consequences on individual consumers. More job displacement could weigh on consumers, causing more belt-tightening and visits to the local Dollarama to save a few bucks on much-needed necessities and food items.

Economic pressures could be a major plus for Dollarama in the new year

Dollarama isn’t just a great way to play a potential recession year; it’s one of the best dollar-store brands in the country. You see, not every discount retailer offers a great bang for one’s buck. In fact, a supermarket may offer better deals for certain goods when it comes to price per quantity. Where Dollarama shines is it’s able to actually offer some of the most competitive deals out there. It’s not just selling less of a good for a lower price but at a less-than-stellar price for any given quantity.

The bottom line on DOL stock

As recession hits, I’d argue DOL stock could continue surging higher, perhaps hitting $110 per share by 2024’s end. Sure, 2023 saw quite a bit of inflation acting as a store traffic driver for the discount retailers. But just because inflation is en route to normalization does not mean Dollarama’s tailwind days will be over.

Arguably, a recession could drive further demand for low-cost goods. As the firm continues its expansion, I believe the 28.6 times trailing price-to-earnings multiple is more than worth the price of admission, given the high calibre of defensive growth you’re getting. Dollarama stock is a buy, in my books.

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

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