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We are opening a new bullish trade on Dollar General (NYSE:DG). DG is a discount retailer that has enjoyed a fantastic bullish run since late 2017 due in large part to the company’s growing market share.
We successfully sold a put on this stock in early 2019, and we think it’s time to do it again.
Walmart Effect And Economic Slowdown
DG has been able to take advantage of the “Walmart Effect” — the hollowing out of small communities by forcing locally owned shops out of business — by moving into those communities and opening stores to offer an alternative to Walmart. This is a well documented phenomenon, and if DG continues to take advantage, the stock will only benefit.
We’re also seeing signs of an economic slowdown. While we personally aren’t too concerned about falling interest rates in the near term, there’s no denying that the inverted yield curve is something investors care about. DG stands to benefit from even a perceived economic slowdown.
Typically when the economy slows down, consumers scale back their shopping. Instead of doing as much shopping at Nordstrom (NYSE:JWN) and Trader Joe’s, they do more shopping at Walmart (NYSE:WMT) and DG. This scaling back boosts revenues and earnings for companies like DG, giving them a boost.
Climbing Back Up After Earnings
DG dropped rather dramatically on March 14 in the aftermath of the company’s earnings announcement. Management announced DG had beaten revenue estimates by $40 million but had missed earnings estimates by $0.05 per share — coming in at $6.65 billion and $1.84 per share, respectively.
The company also issued guidance that was slightly lower than expected. However, after dropping to a low of $108.74, traders recognized the great valuation the stock was trading at and started to jump back in. Barclays even issued an upgrade to its rating on DG, moving it from an equal-weight rating to an overweight rating. The bank cited the stock’s attractive valuation and expectations that the company is going to continue improving its in-store and supply-chain efficiency.
The fact that the company boosted its dividend by 10.3% has also helped because traders are looking for defensive stocks with strong dividends right now. DG is a defensive consumer staples stock that should continue to do well.
With the stock trading near its 52-week highs, we are confident it will continue heading higher in the near term.
To find out which puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
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