Warren Buffett added to his stake in supermarket chain Dollar General (NYSE:DG). There are some good reasons to join him in this stock.

Dollar General is an $11 billion market-capitalization discount store based in Tennessee that sells products like food, cleaning products and pet supplies. It operates 9,414 stores located in 35 states and is 71% owned by a subsidiary of leveraged buyout firm Kohlberg Kravis & Roberts. On Monday, Buffett reported that he held 1.5 million shares of Dollar General.

Here are three reasons to consider investing in its stock:

• Good quarterly earnings — and recent miss made shares cheaper. Dollar General has been able to surpass analysts’ expectations at a pretty consistent rate and has done so infour of its past five earnings reports. However, in its June 1 report for its first fiscal quarter, Dollar General missed expectations. It earned 48 cents per share — 2 cents below expectations — but kept its outlook for 2011 earnings in the $2.20 to $2.30 range. The stock fell nearly 8% on the announcement, which might have prompted Buffett to load up on its shares.
• Reasonably valued stock. Dollar General’s price/earnings-to-growth ratio of 1.1 (where a PEG of 1.0 is considered fairly priced) means it is reasonably valued. It currently has a P/E of 17.12 and is expected to grow earnings 15.5% to $2.58 in fiscal 2013.
• Rising sales and profits with shakier balance sheet. Dollar General has been increasing sales and profits. Its $13 billion in revenues have declined at an average rate of 9% over the past five years, while its net income of $985 million has spiked at a 45.5% annual rate during that period, yielding a solid 8% net profit margin. Its debt has risen faster than its cash. Its debt has zoomed up at an 88.4% annual rate, from $262 million (2007) to $3.3 billion (2011), while its cash increased at a 14.3% annual rate, from $291 million to $497 million during the period.

One reason to hesitate:

• Dollar General is under-earning its cost of capital. Dollar General is earning less than its cost of capital — but it’s improving. How so? It produced positive EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In fiscal 2010, Dollar General’s EVA momentum was 1%, based on 2010 revenue of $11.8 billion, and EVA that improved from -$179 million in 2010 to -$5 million in 2011, using a 10% weighted average cost of capital.

Dollar General probably is not a bad place to park your money over the long term – and it probably is a good test of whether Todd Combs, Buffett’s hand-picked successor in training, has good investment acumen.

Peter Cohan has no financial interest in the securities mentioned.