Last November, I recommended buying shares of retailer Dollar General Corp. (DG). The bull case for DG stock was two-fold: I was optimistic about the retail industry being primed for outperformance, and I was especially excited about Dollar General’s strong fundamentals and consistent history.
As I reiterated last month, the company boasts an impressive, substantial streak of sales growth and a reliable dividend, to name a few positives.
Dollar General was added to the Value Authority portfolio on Nov. 10, when the stock was trading at $65.94 per share, and I recommended readers pull the trigger as long as they could get in for less than $68.
As you can see in the below chart, we timed the low for DG stock almost perfectly. Since then, shares have handily outperformed the S&P 500, which is sitting in the red since the recommendation.
Shares traded for more than $76 recently and are current trading for around $72.
With a double-digit return in our pockets, it’s time for Dollar General stock investors to take profits.
Why Is Now the Time to Sell Dollar General?
All successful investors have a reliable system for knowing when to sell. In this case, the return we’ve gotten, considering the market’s shakiness, is solid. There’s no reason to wait around for Dollar General to report earnings on March 10 — an event that naturally will add volatility — especially since I believe the bull case for the broad retail sector is weakening.
There’s still a lot to like about DG stock, as seen by the fact that Morgan Stanley recently upgraded the stock and bumped its price target. Other analysts are optimistic about the fact that Wal-Mart Stores, Inc. (WMT) is closing some stores, for instance. For the cherry on top, Cullen Frost Bankers is increasing its stake in the discount retailer.
I’m worried there’s too much optimism, though, and feel far more comfortable cashing out. This is largely because I foresee weakness in the sector.
Recently, Kohl’s Corporation (KSS) — another company I like — lowered its earnings estimates — a move that I think may mark the end of the retail segment’s strong outperformance this year. KSS stock fell after the company said its most recent full-year earnings results will be just $3.95 to $4 a share, below previous guidance of $4.40 to $4.60 a share, thanks to weak sales in the holiday quarter.
Given that landscape, I think Dollar General’s projected double-digit annual growth seems overly optimistic, and that the recent run (which leaves the stock with a multiple of 16X) could make the company more vulnerable to criticism and selling if there’s the slightest whiff of weakness in the upcoming earnings report.
We’ve made a nice gain in a short time period with DG stock, and I’d rather celebrate that victory by cashing out then wait for the market to take those gains back.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
