Shares of discount retail firm Dollarama (TSX:DOL) have performed brilliantly over the past few years. Undoubtedly, high demand for better deals of everyday goods combined with an impressive merchandising strategy and expansion have helped the Canadian retail top dog continue to surge above and beyond the expectations of many investors.
If the Canadian economy runs into a bit of trouble in the new year and consumers start budgeting more aggressively again, I wouldn’t be surprised if Dollarama sales were to stay upbeat. Indeed, an inflationary economy to a recessionary one (perhaps Trump tariffs could cause flat-to-negative GDP growth, though I have no idea if they’ll actually be as high as 25%).
With a higher multiple, though, investors should be asking themselves if the defensive growth juggernaut has become a tad too expensive. Sure, Dollarama is a model for how dollar stores and discount retailers should be run. And while the company’s growth profile seems secure, even in the face of inflation or a potential stock market selloff, I still think that paying an above-average price-to-earnings (P/E) multiple is seldom a good idea, especially if expectations ahead of earnings are a tad on the high side.
Source: Getty Images
Dollarama stock is getting a tad pricey
Though I would not ever recommend betting against Dollarama stock, I think there are better market deals right now, as the name is going for more than $145 and change per share and around 37.7 times trailing price to earnings (P/E).
Indeed, that’s a really high price to pay, even for one of the most predictable and stabler growth companies in the consumer scene. As the firm rolls into its latest round of quarterly earnings, I’d argue there’s some chance of a post-earnings pullback should the numbers come up short of investor hopes. Either way, patient investors may get a better opportunity to snag the stock, perhaps at below $135, at some point over the next 18 months.
While it’s hard to find a cheaper high-growth retailer like Dollarama on the cheap, I think the following retail stocks are worth consideration as they progress with their growth plans.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is another well-run retail firm that has a plan to keep growing its earnings at a steady pace over the next couple of years. Indeed, the main headline is that Couche-Tard is still doing its best to win over the right to acquire rival convenience retailer 7-Eleven in a deal that would be historic for the industry.
At this juncture, Couche-Tard investors don’t seem quite sure which pathway the firm will ultimately take. In any case, I’m pretty confident Couche-Tard can get the deal done in the new year. With mostly negativity baked into the stock since the proposed deal hit the headlines, I think there may actually be some meaningful upside should a deal finally become official.
Why?
I believe that investors will gain more clarity into what the 7-Eleven deal could do to the earnings growth profile. Indeed, perhaps Couche-Tard can extract more value than we give it credit for. Either way, the initial sticker shock on the proposed deal seems to be fading as investors pile back into ATD shares at modest multiples. Despite the recent relief rally, I still view ATD stock as a growth gem as a pretty sizeable discount. At 21.7 times trailing price P/E, ATD could prove a bargain right here.
