Dollar Tree, Inc. (DLTR) Stock Is the Perfect Market Hedge

Dollar Tree, Inc. (NASDAQ:DLTR) has jumped like a frog in two days following the company’s better-than-expected second-quarter earnings report. Earnings of 98 cents beat estimates of 87 cents by a mile, while sales growth of 5.7% to $5.28 billion was enough to beat the Street’s estimate for a $5.24 billion top line. That has DLTR stock about 7% higher than where it sat prior to Thursday’s morning report.

Dollar Tree, Inc. (DLTR) Stock Is the Perfect Market Hedge

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And despite what you’ve heard about the death of retail, the future looks bright, too. Dollar Tree guided full-year earnings between $4.44-$4.60 on revenues of $22.07 billion-$22.28 billion, with both midpoints coming in better than analysts expected.

That’s because DLTR stock isn’t your typical retail play. In fact, it might be one of the best stocks you can hold for what could be a turbulent rest of the year.

Trouble’s Comin’

The AOL, Inc. (NYSE:AOL) Time Warner Inc (NYSE:TWX) merger in 2000 was the epitome of overvaluation and excess optimism at the height of the late 1990s dot-com bubble. $165 billion was the ticket price, and there were high-fives all around.

Could it be that this cycle’s equivalent is, Inc.’s (NASDAQ:AMZN) acquisition of Whole Foods Market, Inc. (NASDAQ:WFM), which is now expected to close Monday, Aug. 28?

To be sure, $13.7 billion is not $165 billion, and I don’t expect a $99 billion goodwill writedown two years down the line. But it has a similar bubbly feeling about it with a similar backdrop of technology stocks soaring, too close to the sun some would add.

Many investors have already been remarking on the perplexing extended complacency in volatility. While there have been some recent pops in the CBOE Volatility Index (INDEXCBOE:VIX), the overall index continues to muddle along in the low teens. In fact, in late July, the CBOE Volatility Index closed under $10 per share for seven straight trading days, setting a record. Previously, it was at four days in 1993.

Has the market gone on vacation to Hawaii, thinking that there’s negligible risk?

Lower interest rates due to nonstop rounds of quantitative easing worldwide and the rise of passive investing have fueled increases in asset prices in equities, real estate, and debt. The era of easy money is coming to an end though as the Federal Reserve intends to shrink its balance sheet.

The bears keep howling — about volatility, low rates, and valuation — yet thus far, they have been stymied.

But perhaps not for that much longer. Exogenous shocks to the global system — and yes, it’s a truly inextricably linked system now, as the last financial crisis proved — can come from anywhere. Last time around, the beginning could be traced back to Iceland’s bankruptcy.

This time around, I can see it coming from within (i.e., a domestic catalyst such as pension funding issues like those in Illinois). It also could come externally (China has a housing bubble of its own, and Anbang Insurance’s woes draw attention to a dangerously leveraged banking system).

So, when the dominoes start to fall, where is the safe haven?

Dollar Tree: One Chart to Rule Them All

Talk about alligator jaws. This one chart should be convincing enough.

The S&P 500 was down 29%. The Dow Jones was down 27%. The Nasdaq Composite was down 21%. Everyone was in the red.

But not Dollar Tree. DLTR stock gained 95%!

You might logically then wonder about other discount retailers. Like Wal-Mart Stores Inc (NYSE:WMT). It fared OK, up 13%. Still, that’s not as impressive as Big Lots, Inc. (NYSE:BIG), up 67%, or Family Dollar Stores, which gained 73%. Also, note that Dollar Tree acquired Family Dollar in 2015 — a meaningful buyout that immediately expanded DLTR’s footprint and opened the door for cost synergies.

And what about Dollar General Corp. (NYSE:DG)?

After being taken private by KKR & Co. L.P. (NYSE:KKR) in July 2007, there was a quick turnaround, and Dollar General went public in November 2009. It’s reasonable to believe Dollar General would have weathered the recession in good form, but Dollar Tree has been the been the stronger performer since market trough territory in late 2009. Since its IPO, Dollar General has gained 217% versus 320% for DLTR.

Bottom Line on DLTR Stock

From a multiple perspective, Dollar Tree (21x after the earnings pop) is not as cheap as DG (17x) or BIG (13x). However, its performance through the last financial crisis should give investors confidence in its ability to outperform during future recessionary periods. We are not just talking less losses but major gains throughout a very uncertain time.

Until recently, DLTR stock traded close to its 52-week low, likely due to overhang from the dark rain cloud that loomed over all brick and mortar retailers. But after beating earnings expectations in a big way, with net sales up 116.7%, it’s just sunny skies in spite of a competitive landscape that has indeed changed since 2008. Family Dollar pulled its weight, and yet another quarter of same-store sales growth was delivered.

Dollar Tree has proved that it can perform well in good times and even better in the bad, making DLTR stock a strong choice to hedge and grow your portfolio.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.

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