Is Dollarama (TSX:DOL) a good stock to buy? In one word, yes. Dollarama is a good retail stock you can buy in general, but like any other stock, it has ups and downs. So, it might naturally be more attractive to some investors in certain market conditions and undesirable to others in the same conditions.
Short-term potential
If we rephrase the initial question, the answer is more complicated. After experiencing a powerful bull run that pushed the stock almost 59% and covered a little over the first 10 months of the year, the stock has finally started to dip.
After a 6% slump, it’s just modestly discounted right now but enough to make it attractive for investors who want to buy a powerful growth stock at a discounted price.
However, there is another factor to take into account — its price-to-earnings ratio of 36. This makes the stock undesirable to value investors. Multiple analysts have also put its fair market value way below what it’s currently trading at. The financials of the company are strong, and the company posted good third-quarter results, but there are still chances of a correction.
The short-term potential might not be very good. The current slump might continue for a while, and even though it would push the yield up, the chances of it even crossing the 1% threshold are relatively low (it’s at 0.26% right now).
Long-term potential
The long-term prospects and potential of Dollarama look significantly healthy, and if its history is any indication, Dollarama can be a powerful addition to your portfolio. The stock returned over 600% to its investors in the last decade alone, and if it continues to grow this way, it might offer you more growth in one decade than many other conservative growth stocks might offer in three or more.
Another reason to trust its long-term potential is the company’s fundamentals. Its financials are healthy, and it has minimal debt, making it a financially viable option.
The company also has decent growth opportunities. It has already expanded its footprint in Canada at a rapid pace and is planning to surpass this growth rate in the coming years. It’s also increasing its footprint in foreign markets, primarily Peru and Colombia. This may be a more aggressive expansion compared to the organic growth at home since these markets are relatively less saturated.
Foolish takeaway
So yes, Dollarama stock is a good buy, though it’s not right now. Consider waiting for the stock to drop further and for the valuation to reach a more reasonable level. If you can buy just before the stock becomes bullish again, you may be able to maximize the returns from this stock.
You will also lock in a higher yield. It may not be high enough to be a purchase decision factor on its own, but it will still raise the overall return potential of the stock.
