There’s no question that one of the best stocks to own on the TSX is Dollarama (TSX: DOL), the $53 billion discount retailer.
On paper, the company is the perfect defensive growth stock. It’s a discount retailer that excels in recessions and weak economic environments, but also continues performing well when times are good.
Meanwhile, Dollarama has consistently proven that it’s not just resilient but it can actually thrive across all economic conditions and has grown not only rapidly, but consistently for more than a decade now.
Year after year, Dollarama stock finds ways to grow its revenue, expand its store count, and increase its profitability, all while maintaining its competitive edge.
This is what makes a high-quality defensive growth stock so valuable. They provide investors with protection during downturns while still delivering consistent growth during expansions.
So, rather than sacrificing upside for stability with traditionally defensive stocks, a company like Dollarama offers the best of both worlds.
There’s no question it’s one of the best stocks you can own. But because of its quality, it almost always trades at a significant growth premium, making it considerably expensive. So, the question is whether it’s worth buying today.
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Why is Dollarama one of the best stocks to own?
As I mentioned above, Dollarama isn’t just the ideal company on paper; its track record speaks for itself.
For example, over the past decade, as Dollarama has continued to expand its store count and drive same-store sales higher, its revenue has increased at a compound annual growth rate (CAGR) of 10.7%. Furthermore, its normalized earnings per share (EPS) increased at a CAGR of 18.9%.
That would be impressive growth for any billion-dollar company in a single year, let alone doing it consistently for a decade.
And that consistency in its business has led investors in Dollarama stock to earn a total return of 682% over the last decade, a CAGR of 22.8%.
And looking ahead, Dollarama stock continues to have a clear runway for growth. Domestically, it continues to expand its store count, with plans to add roughly 60 to 70 new locations each year in the near term.
In addition, though, its investment in Latin America through Dollarcity has already shown strong results, and management believes there is significant growth potential in that region. Furthermore, Dollarama has even started to expand into Australia, opening up yet another long-term growth avenue.
Is the discount retailer a buy or sell?
Although Dollarama stock is unquestionably one of the best stocks you can own, the one challenge has always been its valuation. For years, the stock has traded at a premium to the broader market, and that hasn’t really changed. In fact, over time, the premium has slowly increased.
Yet investors continue to show they are willing to pay up because of the company’s rare combination of defensive stability and consistent growth.
For example, even with analysts estimating that Dollarama’s revenue will increase at a CAGR of 11.3% over the next two years, and its normalized EPS will increase at a CAGR of 12.6%, the stock is still trading at a forward price-to-earnings (P/E) ratio of 40.7 times.
That’s not only significantly higher than its five-year average forward P/E ratio of 28.4 times, but it’s also nearly the highest it has ever been.
So, while you may want to wait for a more reasonable entry point if you’re looking to gain exposure to Dollarama stock, just because it’s expensive doesn’t automatically make it a sell.
With high-quality businesses, valuation often takes a back seat to execution. Dollarama has proven time and again that it can grow its operations and profitability, rapidly and consistently.
That’s why it’s a stock you buy and hold for the long haul. As Warren Buffett famously said, “Our favourite holding period is forever.”
So, although it may be trading at a premium in the current environment, Dollarama remains one of the best businesses on the TSX and the type of stock you want to own for decades.
