Value Shopping at Dollar Tree

01/08/2016 7:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

We see three main reasons why this low and discount price retail operator has come back to life during the past few months, notes Mike Cintolo, editor of Cabot Top Ten Trader.

The first factor helping Dollar Tree (DLTR) is the economic environment; a few million people have found jobs during the past year, but wages remain stagnant. Translation: Millions of people are still spending frugally, which plays into Dollar Tree’s hands.

The second reason is the plunge in energy prices; evidence is beginning to pop up that consumers are spending money saved at low-end and mass market retailers.

And third, you have Dollar Tree itself; the company merged with Family Dollar in the middle of last year ($8.5 billion cash and stock deal).

Not only did this make it the largest player in the industry, but it is also creating a ton of synergies.

Dollar Tree’s management believes they can find $300 million in cost cuts by 2018 (well over $1 per share) and most analysts see that as conservative.

The third quarter report was solid, with same-store sales up 2.1% and the integration proceeding on schedule.

Earnings have dipped of late—mainly due to some transition costs and a slowdown in business—but analysts see this year’s figures booming toward $4 per year and growing steadily after that. It’s not sexy, but Dollar Tree has the catalysts in place to continue higher.

Despite the steady business, DLTR’s stock has had many ups and downs over the years.

The latest correction started in March of last year and picked up steam when the market fell apart in August and September, shares eventually fell 28% over seven months before finding support in October.

Then the buyers returned, with a positive earnings report pushing DLTR back above its 200-day line. And, importantly, the stock has held those gains during the past few weeks, chopping between $75 and $80.

We’re okay with a small buy here and a stop in the low $70s; a decisive move above $82 could be reason to buy a bit more.

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