An Undervalued Play: Invest in Dollar General and Ollie’s Bargain Outlet

It seems like there’s always someone new calling for a stock market crash.

I guess if you say that every day, you’ll be right eventually. But over the past 71 years, how many times has the S&P 500 Index had a year where it declined 10% or more? The answer is six.

And the worst five-year return since 1973 is about a 5% loss.

My point is that market crashes barely ever happen. Of course, it’s good to protect some of your money from one, but let’s remember that the stock market goes up over time — always.

The bears may have a few good arguments, but right now it’s hard to find anything about our economy that’s not amazing. If you’re not caught up to speed on the latest stats, here are a few highlights:

Overall personal spending has increased for 39 out of the past 41 months, the longest streak since 2005.
Retail sales (excluding automobiles) have gone up for 21 of the past 22 months, the longest streak since 1999.
Consumer confidence, which is used to predict future consumer spending, is at its highest level in over 17 years.

And then, of course, we have unemployment near record lows. That’s because over 2.5 million jobs have been created in the past year alone.

A company called ADP tracks the number of jobs added per month, and each month it gives a prediction of how many it thinks will be added. Over the past year, 10 of the 12 months have seen more jobs added than ADP expected.

In short, we haven’t seen a U.S. economy this strong in a long time.

All of these stats are perfectly good reasons to buy stock in retail stores. And I’ve got picks for two similar types of stores, but with different investment strategies: value and growth.

A True Growth Play

The first stock is Ollie’s Bargain Outlet Holdings Inc. (Nasdaq: OLLI).

This pick is based on growth, which believe it or not is still happening with brick-and-mortar stores despite Amazon supposedly stealing all their market share.

Online sales are only 9.1% of total retail. That means there are brick-and-mortar companies that are still growing. And Ollie’s is a great example of that.

In fact, over the past year it has grown its sales an amazing 21.8%.

I’ll compare that to some of the other popular discount stores out there. That’s nine times more than Kohl’s, six times more than Walmart, five times more than Target and over twice as much as Ross and Lululemon.

In short, that’s a true growth play. 21.8% sales growth is hardly ever seen from a discount store.

Not only that, but Ollie’s is also expanding at a fast rate. In the past two years, it has gone from 208 locations to 276. That means it has grown its number of locations by over 32%, another number rarely seen in this industry.

That’s more than Target, Walmart, Ross, Kohl’s and TJ Maxx combined. It’s even more than McDonald’s, Chipotle and Dunkin Donuts, which seem to pop up on a new corner every weekend.

You could argue that growing this fast may not be a good idea, because it’s expensive and could hinder Ollie’s overall profits. However, it has seen an average increase in sales per store as it’s doing this, which more than makes up for all those costs.

As a result, Ollie’s profits have more than tripled over the past two years. When you look at the numbers, it has had higher net income growth than Amazon. It’s doing this in the face of big, scary online retail, and it’s winning.

Of course, the expectations for Ollie’s in the future is also high. This year, it’s expected to grow its sales by 15% and profits by 37%.

But it has quietly shown over the past two years that it’s more than capable of that, and it wouldn’t be much of a surprise if it exceeded expectations. That’s what Ollie’s has done every single quarter since it went public in July 2015.

Profit From Wall Street’s Mistake

The second strategy is value. And looking for a value stock is a little less obvious.

You want to look for something that is selling for lower than it should, so basically a stock that’s on sale. And I believe that Dollar General Corp. (NYSE: DG) is a retail stock that fits that description.

It’s second to Ollie’s in a few growth factors within its industry, but its stock price hasn’t reflected that.

First, Dollar General has added over 2,000 locations over the past two years, which is 16% growth. Even though that’s just half the growth of Ollie’s, it’s still extremely high.

And on average, the rate Dollar General sells and replaces its inventory is second in the industry, and is better than Ollie’s.

There are high hopes for further growth with Dollar General. The expectations on Wall Street are that it will grow its profits by 33.5% this year, which would be its highest growth since 2011.

However, Dollar General’s stock hasn’t gotten the love it deserves, and I believe it’s priced unreasonably low.

The easiest way to measure a stock’s value is by looking at it versus the company’s sales. Right now, the company is valued at just 1.11 times its annual sales. It’s a $26.28 billion company, and sales over the past year have been $23.98 billion.

That valuation seems a bit unfair for a company that’s expanding at the rate that Dollar General is, and that’s expected to have its highest profit growth in seven years.

The Bottom Line for Retail

Looking at how well the economy is doing overall, there’s no reason either one of these stocks should perform badly over the near future. As long as people keep spending, and as long as these companies keep growing, both of them should hold up well in this market.

Regards,