3 Things You Need to Know If You Buy Dollarama Stock Today

After earning investors a total return of 700% in the last 10 years, here are a few key facts to know before buying Dollarama stock today.

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One of the most popular stocks on the TSX over the last year, and for good reason, is Dollarama (TSX:DOL). The impressive performance and rapidly increasing share price have caught the attention of investors, especially while an uncertain market environment and severe economic headwinds impact many other stocks.

To see Dollarama stock excel while most other companies struggle is not entirely surprising. After all, it’s a discount retailer with more than 1,400 stores across the country. And it’s one of the best-known brands among consumers, particularly ones looking to save money and buy essential goods at discounted prices.

The stock has proven what a reliable investment it can be over the long haul, as it has consistently grown year in and year out, no matter how the economy has performed.

However, if you’re considering an investment in Dollarama stock today, here are three things to know before you pull the trigger.

Dollarama’s recent growth has been driven by economic conditions

The first thing investors need to know if they’re looking at buying Dollarama stock today is that much of the impressive performance lately is due to the impacts the economy is having on consumers.

Now, of course, Dollarama is a high-quality stock that has improved its merchandising in recent years and grown its customer loyalty, which is taking advantage of today.

However, it’s worth noting that Dollarama has seen higher-than-normal growth in the last few quarters as a result of both surging inflation and higher interest rates.

Therefore, while Dollarama should continue to grow its sales and profitability no matter what the economic conditions, as the economy improves, the rate at which Dollarama has been growing its operations over the last few quarters will almost certainly slow down.

Dollarama stock trades at a growth premium

It’s also worth noting that Dollarama stock trades at a significant growth premium. Investors know it’s one of the best and most reliable defensive growth stocks on the TSX. Furthermore, it’s widely known that Dollarama has the potential to rapidly and consistently grow shareholder value.

In fact, over the last decade, Dollarama has earned investors an astounding total return of 705%, or a compounded annual growth rate of 23.2%. So naturally, as the demand for such a high-quality stock increases, Dollarama has begun to trade at a premium.

Currently, Dollarama stock trades at a forward price-to-earnings ratio of 28.7 times, slightly above its three-year average of 26.3 times. However, that’s well higher than the majority of its retail competitors.

Highlighting this premium for Dollarama isn’t meant to dissuade you from investing in the high-quality stock, but if you’re going to buy the discount retailer, it’s essential you’re aware of how expensively it trades. It’s also why you should only buy Dollarama stock if you plan to hold it for the long haul.

Only buy Dollarama stock if you’re investing for the long haul

Like almost every other stock on the market, Dollarama has the potential to be highly volatile, and it’s entirely possible it could lose considerable value in a short period of time.

Even DOL didn’t do anything to deserve a hit to its share price, sometimes a macroeconomic development or just the expectation that Dollarama could face headwinds in the future can cause the stock to decline.

So, considering the growth premium you have to pay for Dollarama, it is essential to buy the stock for the long haul. After all, the whole reason it’s such an attractive stock that’s in high demand from investors is for its long-term and consistent growth potential.

Investing for the long haul mitigates short-term risk. So no matter how Dollarama performs over the next year or two, as long as it can consistently expand its operations and grow revenue for several years or even decades to come, your capital should grow rapidly alongside it.

And considering Dollarama plans to open 60 to 70 stores for at least the next five years, plus its Latin American investment, Dollarcity, is growing rapidly itself, there’s no question that if you plan to hold Dollarama stock for the long haul, then it’s one of the best investments you can make 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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