Dollar General

In my last blog, I mentioned that Dollar General (DG) might be a good retail investment. It was trading around $13.70-$13.80. Since then, it has jumped above $15. Unfortunately, I was waiting for a price below $13 to start picking up some shares. As a result, I did not pick up any shares.

However, it is still important to understand why Dollar General is a good investment below $13. The last year has been tough for Dollar General. They have missed same store sales numbers and will report earnings of $.90 this year as compared to $1.08 last year. But the important fact remains that there has been no dynamic shift in the industry. The dollar store format still seems like a viable business. The same store sales miss can probably be attributed to a variety of external factors such as high oil prices, etc... The miss could also be attributed to addressable internal factors such as merchandising issues. But the most important fact is that the business model is still viable. Also, add to the fact that Dollar General is a cash flow machine (like most retailers) and is buying back tons of its own shares, you have a good investment.

There is no magic formula to figure out when to start buying the shares. Generally, I like to buy the shares at 12 times the reduced earnings estimates.