When it comes to investing for the long haul and working toward financial freedom, there’s no question that growth stocks like Dollarama (TSX:DOL) can be some of the best investments.
The ideal situation is finding companies that can grow consistently year after year, not just in favourable conditions, but across all economic cycles. That’s where defensive growth stocks like Dollarama stand out. They combine steady expansion with the ability to hold up well when the market or the economy faces turbulence.
For example, in Dollarama’s case, when the economy slows, consumers shift their spending habits toward saving money, which often means shopping at a discount retailer. However, when the economy improves, many of those habits stick, as shoppers redirect savings toward other discretionary purchases.
That dynamic means there’s really no economic environment that works against Dollarama’s business model. And therefore, the company continues to execute and provide investors with highly consistent, defensive growth.
So with its growth runway still stretching decades ahead, there’s a strong case that Dollarama could be worth over $240 per share within the next two years. Here’s why.
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Dollarama stock is still growing rapidly
Although Dollarama is now a $53 billion stock, its growth story remains far from over. In fact, the company continues to open roughly 60 to 70 new stores per year, steadily expanding its footprint across Canada. Plus, in addition to adding new locations, it’s also generating attractive same-store sales growth, which is a clear sign that existing stores are performing better over time.
Furthermore, internationally, the story is equally compelling. Dollarama’s investment in Latin America has already proven highly successful, with operations in that region showing strong traction and significant growth potential. This market offers decades of runway for expansion, as the discount retail model tends to thrive in economies where consumers are focused on stretching their purchasing power.
And just this year, Dollarama also announced its expansion into Australia, another major opportunity to replicate its proven business model in a new market.
High-quality growth stocks typically trade at a premium valuation
The one downside about a stock like Dollarama is that it almost always looks expensive. At the same time, though, the stock has consistently justified that premium valuation. Its steady growth, strong profitability, and defensive business model make it a favourite among long-term investors.
Therefore, trying to buy Dollarama at a discount can be difficult. In fact, over the last five years, its forward price-to-earnings (P/E) ratio has averaged 28.3 times, reaching as high as 41.5 times, essentially where it’s trading today. And more recently, over the past year, with economic uncertainty driving demand for defensive stocks, its forward P/E ratio has averaged more than 35 times.
From a trailing perspective, Dollarama’s P/E has averaged 32.4 over the last five years, hitting a high of 44.5, again right in line with current levels.
So if we’re looking ahead, trying to predict where Dollarama stock could rally to in the future, analyst estimates suggest that in two years, Dollarama should have a trailing earnings per share (EPS) of $5.22 and a forward EPS of $5.86. Applying today’s valuation multiples to those estimates gives a compelling picture.
$5.22 times a trailing P/E ratio of 44.5 would equate to a share price of $232.29. Whereas $5.86 of expected EPS times a forward P/E ratio of 41.5 times would equate to a share price of $243.19.
These prices are, of course, just a prediction. If Dollarama grows faster than expectations, or if valuation multiples climb higher, the stock could easily surpass those levels. On the flip side, if its valuation contracts even slightly, it could temper gains in the short term, even if earnings growth comes in strong.
That said, though, these are short-term risks. Meanwhile, Dollarama is the kind of stock you buy with a decades-long horizon in mind, not just a couple of years.
So, for now, with Dollarama stock trading at the high end of its historical range, some investors might wait for a modest pullback to initiate a position.
However, with the company’s growth momentum showing no signs of slowing, waiting too long could mean missing out on a name that has delivered exceptional returns for years and is well-positioned to keep doing so.
