A Big Opportunity in an Overlooked Discount Retailer

I’ll never forget the day I understood that my wife is an investing genius.

Back in 2009, I didn’t listen to her when she recommended I buy Lululemon (LULU). And I’m still kicking myself.

Her premise was deceptively simple. LULU’s leggings were comfortable and flattering. She’d noticed them flying off the shelves in both New York and Baltimore. And, even though they were expensive, she found them more than worth the price. Other people likely would, too.

“I think we should buy some shares,” she said.

I pooh-poohed the idea. I’d just watched the share price drop from its IPO of $9 to about $3 at the time of our conversation. All I could think about was the poor track record of IPOs that cratered post-launch. It can be a sign that investors don’t believe in the story.

I thought that Lululemon was a fad. “The company will be out of business soon,” I told her.

Boy, was I wrong...

Lululemon is now one of the biggest athletic clothing brands in the world. It’s hard to go anywhere and not see someone wearing Lululemon yoga pants or a copycat. The stock is up 127 times (!), to around $383 per share. (And I still regret not buying it back then!)

When I turned down my shot at LULU, I over-thought the idea and made an easy concept complicated. My wife, on the other hand, cut through the noise and saw a quality product with growing demand. In hindsight, it should have been clear.

As some of the most successful investors of all time, like Warren Buffett and Peter Lynch, will tell you, simple concepts are often the most successful way to make money.

But often, Wall Street makes the same costly mistake I did. It ignores simple ideas – the ones that work – because “it’s just too obvious.”

We’re going to profit off one of those overlooked stocks today…

Fund Managers Don’t Care About This Sector – But We Do

One of the easiest mistakes we make when investing is complicating an idea. Whether you’re on Main Street or Wall Street, we all do it.

But in investing, success often boils down to keeping an idea simple, because it’s easy to understand a basic concept. And the more we understand a company’s story, the more confidence we have in buying those stocks or bonds.

As Buffett put it, “Never invest in a business you can’t understand.” And as Peter Lynch once stated, “If you don't understand a company, if you can't explain it to a 10-year-old in 2 minutes or less, don't own it.”

Today, Wall Street is throwing money at businesses they don’t understand.

Money managers have spent much of the year worrying about an economic collapse. That means they’ve been holding onto the investments they already owned and not putting money to work in new ideas.

In the meantime, beaten-down technology stocks have rallied on bets the Federal Reserve is done raising interest rates. The tech-heavy NASDAQ Composite Index is up over 30% year to date. Now, those same investment managers are chasing gains in pricey AI-driven technology companies.

But there’s a catch. When you need funds to invest, you have to find the money somewhere. So, fund managers have used the shares of mass merchants and discount retailers that offer critical products to households across the country, as a source of funds. And the recent drop in some of those stocks is creating extra value.

Which brings us to our next investment idea, also courtesy of my wife.

How We’ll Profit

Lately, my wife has been hung up on inflation.

She manages the family bank account, and she keeps track of every penny. And since prices started rising, she diligently monitors what’s spent on gas, food, and clothing. (God forbid I spring for a Starbucks cold brew or use anything other than regular gas in my car.)

She’s also constantly “shopping around” to find lower prices – forget loyalty to any store, brand, or chain. Her friends and relatives all do the same… especially families with young kids.

We want to capitalize on that trend. So we’ll take advantage of a recent selloff in the shares of Dollar General (NYSE: DG).

Dollar General is no-frills. Most of its stores are in towns of 20,000 people or less, across 45 states. It offers a wide range of goods, including food, paper products, pet supplies, toys, and health and beauty aids. But its appeal is the ability to offer products at a discount to other mass merchants.

Over the last three years, its revenue has grown from just over $27.7 billion to more than $38.8 billion. And over the next two years that number is expected to grow by another 10%.

At the start of June, the company reported disappointing earnings results. Management said the current inflationary environment had proven more difficult than it originally thought. The company lowered its earnings outlook, and said it would no longer plan to buy back stock in 2023, compared to its previous guidance for $500 million in share repurchases.

Investors didn’t like what they heard. Over the next several weeks, Dollar General’s shares were pummeled 20% as big money headed for the exits (and into more “attractive” tech stocks).

But recently, all that selling triggered a short-term buy signal…

Every stock has an indicator known as the Relative Strength Index (RSI). It measures short-term momentum and tells us whether a company’s shares are overbought or oversold. When the index hits 70 or above, the shares are overvalued (red line below). When the index reads 30 or below, the shares are undervalued (green line below).

Right now, the RSI on Dollar General is just under 38. That means the shares are cheap in the near term. The last time this set-up happened was back in March. The stock rallied 7% over the following month. We wouldn’t be surprised to see a similar reaction this time.

That’s why we recommend buying the shares of Dollar General (NYSE: DG). Pay no more than $173 per share, and use a 20% trailing stop. We see potential for the stock to rally all the way back to its 50-day moving average of $199.

When in doubt, follow the K.I.S.S. principle (keep it simple, stupid). Dollar General provides an important service for many Americans by offering everyday items at a cheap price. Its business isn’t going away, and a slowing economy will likely make its services increasingly appealing to more Americans.

The recent drop in the stock has made its valuation more appealing, providing us with an opportunity to make money.

Scott Garliss

Porter & Co.
Stevenson, MD