Momentum investing is wonderfully simple right up until everyone heads for the exit at once.
Momentum investors buy the stocks already going up, watch valuations expand, and feel extremely clever. Then interest rates jump, investors become nervous about growth, and suddenly the stocks that could do no wrong need to prove every dollar of their valuation.
That has been happening across markets lately. Higher bond yields, renewed inflation concerns, and worries about economic growth have put pressure on expensive winners. The S&P/TSX Composite recently fell to its lowest level since July, as investors became considerably less willing to pay any price for future growth.
For long-term investors, that isn’t necessarily bad news. Sometimes the momentum disappears faster than the business does. That’s why I’m looking again at Dollarama (TSX: DOL).
Source: Getty Images
Looking cheap
Dollarama shares recently traded around $175, down roughly 17% from their 52-week high near $210. That isn’t exactly a market crash. Yet it’s a meaningful reset for a company that had spent years behaving as though gravity were mostly a suggestion. More importantly, the share-price weakness doesn’t match what happened in Dollarama’s Canadian stores.
Second-quarter Canadian comparable sales increased 5.4%, with customer traffic climbing 3.7%. Management was confident enough to raise its fiscal 2027 Canadian comparable-sales outlook to between 4% and 4.5%, up from 3% to 4%. That’s exactly what I want to see during a selloff. The share price lost momentum. Customers did not.
Keeps working
Dollarama’s business proposition isn’t complicated. Sell inexpensive household products, snacks, seasonal goods and other everyday items from thousands of stores while keeping costs ruthlessly under control. That model becomes particularly useful when Canadians feel poorer.
Higher food prices, fuel costs and economic uncertainty can push consumers toward cheaper alternatives. Dollarama doesn’t require households to feel fantastic about the economy. A slightly irritated consumer carrying a $5 bill works just fine.
The company is also expanding internationally through Dollarcity in Latin America and its newly acquired Australian operation. Company-wide second-quarter sales rose 17.6% to $2.03 billion, while earnings reached $1.29 per share. That provides another growth runway beyond simply squeezing more Dollarama stores into Canadian parking lots.
Considerations
Dollarama isn’t cheap. Even after the selloff, shares trade around 33 times forward earnings. That’s far below the enthusiasm investors displayed near the highs, but it’s still a premium price for a retailer.
Australia is also making the numbers messier. Consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) margin dropped to 32.2% last quarter as the company absorbed a full quarter of the lower-margin Australian business and continued integrating operations.
That acquisition needs to prove Dollarama can export its sourcing and merchandising magic rather than merely export its name. A weaker Canadian consumer can help traffic, but tariff pressure, freight costs and inflation can still squeeze margins. So, I wouldn’t call the stock a screaming bargain.
Bottom line
A great business and a great stock aren’t automatically the same thing when investors pay too much. Dollarama looks more interesting because some of that enthusiasm has now disappeared. Canadian same-store sales remain healthy. Traffic is growing. Management just raised guidance. International expansion provides another potential growth engine.
Yet the stock costs materially less than it did near its peak. I’d start a position rather than pile in all at once. If volatility knocks another chunk off the valuation while the operating numbers remain strong, I’d happily add more.
