Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 2
In the years leading up to the pandemic, DG and WMT's same store sales pretty much tracked consistently, and they haven't in the past few years. I can't take credit for noticing this, TSOH Investing Service flagged this. It seems that WMT has been beating DG recently. Something may have changed here.
Retail is hard
No. of Recommendations: 33
I think that in this context the thing to remember is that DG stores are *heavily* concentrated in tiny/rural locations.
Consequently I think the biggest effect we're seeing is that the people for whom this is the closest store, or the only store within reasonable distance, are struggling financially. At the very least, this seems clearly to be the reason that the stuff that is selling has had a huge recent skew towards consumables: DG's food and "food" offerings are cheaper than food elsewhere, and spending on durables can wait. It's not because DG management made a bone-headed decision to push low margin consumables: the clients are making that choice. Seen that way, the competition isn't Walmart, the competition is "not spending that money". Or not having that money to spend.
As a result I think the biggest question hanging over DG's head about the speed and magnitude of their return to something like their historical trajectory is the extent to which one views the struggles of this population as a cyclical problem. If it's just because the US is headed into a garden variety recession, it's not that big a deal. If there are stronger structural issues, like depopulation and the decline of viable business niches in small town areas, it could be a bigger long term problem.
No matter which of those is true, I remain optimistic. I think the current price ($113.81) represents something either very good or outstanding as an investment prospect. I anticipate solidly double digit returns over a variety of time frames starting here.
Of course, I might be nuts.
I mentioned yet one more bad way to come at it at mungofitch.com. The post looks at price-to-sales ratio which has the implicit built in assumptions of at least some mean reversion of both net margins and market multiples.
Jim
No. of Recommendations: 1
Walgreens (WBA), CVS are also neighborhood stores that have stronger hold on customers with pharmacy-led health and beauty products. Their stocks don't look good in the past five years.
Retail is hard
No. of Recommendations: 1
Unless you're Amazon and everyone gives you the benefit of the doubt PE 110?
No. of Recommendations: 1
"Unless you're Amazon and everyone gives you the benefit of the doubt PE 110?"
Or Costco P/E 41...
Or Walmart P/E 32...
No. of Recommendations: 8
No. of Recommendations: 0
I thought I recalled an analysis by Jim of forward returns versus Price/Sales bucket for DG but can't find it using datahelper.
If such an analysis is available it'd be delightful to see. Thanks!
No. of Recommendations: 6
No. of Recommendations: 19
I thought I recalled an analysis by Jim of forward returns versus Price/Sales bucket for DG but can't find it using datahelper.
I'm not sure, but I don't think I did that for DG.
I have done it for a few other firms that price/sales has some value, like GOOGL.
Price-to-sales makes some sense for DG, *provided* you are comfortable with the built in assumptions that (1) net margins will go back to their old normal range give or take, and of course (2) that valuation multiples will at least visit their old normal levels. Frankly I'm not 100% comfortable with either of those.
The problem with such an analysis for DG is that P/S was in one range for a while, then a different higher range. The reason is simple: like Berkshire, DG pays a high effective tax rate, so the tax cuts at end 2017 made a big difference to profitability. The tax rate averaged 36.5% 2013-2017, then averaged 21.9% 2018-2022. Consequently net margins went up, from an average of 5.62% to an average of 6.74%. Each dollar of revenue started generating 20% more net profit. Other things being equal, if you assume that the tax cuts are permanent, the "normal" price-to-sales ratio should rise by the same 20% amount. In fact the average multiple rose more than that: the average went from around P/S 1.0 to P/S 1.41 in the last five years. (very slightly different time slices, but you get the idea). Perhaps some of that was market exuberance.
So, several moving parts. One way to come at it: Let's take the older number of 1.0 times sales as the somewhat more conservative number for normal, at that old net margin. Let's conservatively assume that the tax cuts aren't permanent. Headline went from 35% to 21%, I have been pencilling in a moderate rebound to about 25%. Roughly speaking, I'm assuming that 70% of the tax cut is permanent and 30% temporary. So, ignoring any other moving parts, I should expect the new normal P/S ought to rise from 1.0 to 1.14. (being 70% of the 20% bump from tax cuts).
Because of all this jiggery-pokery, rather than looking at the historical relationship between P/S and forward returns, I think it's better to simply estimate what the trajectory of sales and price will be in future from these figures. Trailing four quarters sales are $174, so at P/S 1.14 that means that the price "should" be about $198 now on a cyclically adjusted basis. Then add whatever you think the sales growth rate will be at the end of your forecast horizon. Sales per share have risen 12.5%/year in the last dozen years, so pick a forward number for math purposes, say 8%. That suggests that sales would rise 36% to $237 in the next four years, which at 1.14 times sales would be a (nominal) price target of $270, or 24%/year compounded from today's $113.66 price, minus inflation, plus dividend yield.
Modify assumptions to suit your greed and fear : )
Jim
No. of Recommendations: 1
Hi Jim. Thanks for your generous sharing of insights.
I have some DG and planning to add to my position. What are your thoughts about these different ways of accomplishing that:
- Simply buy shares now at current price.
- Set a limit order (question is how far below current price)
- Write puts and either collect a decent premium and roll or get assigned at a more favorable price
- Buy ITM calls (you often do that to take advantage of cheap uncallable leverage)
No. of Recommendations: 7
What are your thoughts about these different ways of accomplishing that:
- Simply buy shares now at current price.
- Set a limit order (question is how far below current price)
- Write puts and either collect a decent premium and roll or get assigned at a more favorable price
- Buy ITM calls (you often do that to take advantage of cheap uncallable leverage)
I think #2 and #3 are more suited to situations that there is no particular reason to think there is a good chance of a biggish upside some time soon, or you think it isn't really cheap. And I lean towards puts only when it's a ticker that I'm likely to do it repeatedlyl against the same ticker for years.
DG seems cheap enough to me that there is no lack of upside. Presumably there is a capitulation price we're going to hit soonish. It could and should bounce a lot from there, maybe accelerated by short covering. I have no idea whether that will happen, but it's absolutely plausible, so you don't want to be positioned in a way that doesn't do particularly well for you if it happens.
Consequently I favour (and have done) #1 and #4. Keep the upside.
I'm also considering a fifth alternative: a few out-of-the-money calls for entertainment value as lottery tickets. I speculate that if I could pick the right one, it could be a ten bagger.
Jim
No. of Recommendations: 1
Jim , are you still in favor of the jan 2026 call for DG ? I'm looking at the Jan 100 call
No. of Recommendations: 1
Makes sense.
What about a sixth option - but upon short-term reversal of momentum (e.g. crossing above 50 day MA as a sign of bottoming). I know you frequent the Falling Knives board. To me, this option could protect against additional fall in price ("The market can stay irrational longer...").
No. of Recommendations: 4
are you still in favor of the jan 2026 call for DG ? I'm looking at the Jan 100 call
I'm agnostic.
I think I mentioned that one just as an example.
Given the sharp sell-off, I imagine only the very low strike ones have implied interest rates that one could live with.
These tie up a lot of money, but remember that once the stock rises (which I personally assume is the case), you can roll them up to a higher strike at a reasonable rate and free up that cash again.
In the same vein, you can buy stock now and switch to calls later when it's cheaper. Assuming you have a spare pile of cash that you don't mind tying up till the stock bounces.
Jim
No. of Recommendations: 1
thanks Jim !
No. of Recommendations: 1
Hey Jim -
Your comment about the sharp sell-off and potential capitulation makes me wonder whether you have ever developed a signal analagous to your major bottom detector for individual names?
Some combination of RSI, % below a MA, or something else
thanks
No. of Recommendations: 8
whether you have ever developed a signal analagous to your major bottom detector for individual names?
No such luck.
For now, the old saw stands: nobody buys at the exact bottom, when they're truthful.
For value investors, we always buy too early and sell too early.
The best I can do is when Berkshire falls to a valuation level that is a slam dunk buy. Not to be confused with a price bottom.
Jim
No. of Recommendations: 1
the jan 2026 call for DG ? I'm looking at the Jan 100 call
That's 13% ITM--not particularly deep.
I'm showing a pseudo-interest rate of 10.3% for that one. The Jan'25 for 12.2%.
For comparison, the BRK.B 320 is also 13% ITM, rate is 7.5%.
DG is up today, maybe the beginning of the wash-out? I bet that there will be a wave of selling in the next 2-3 days as people see this as a chance to get out. Maybe it'll hit my 110 GTC order.
No. of Recommendations: 17
Might I suggest that this discussion of Dollar General be transferred to the Dollar General board?
As a recent shareholder I am interested in the discussion but (a) it is confusing and partially redundant to have it on 3 boards (also Falling Knives) and (b) it is probably not of much interest to fans of Berkshire who are not investors in DG, and the dozens of posts on the Berkshire board is verging on being disrespectful to them.
In the same vein, might I mention that there is also a reasonably active board called Retirement Investing? I realize that the Berkshire board is where the action is, but it would be possible to post something like 'OT: annuity strategy question for Jim', and then post a one sentence teaser with a link to your post on the relevant board.
Thanks for considering this suggestion - DTB
No. of Recommendations: 1
DTB...point taken.
Wilco.
m
No. of Recommendations: 2
In the same vein, might I mention that there is also a reasonably active board called Retirement Investing?
reasonably active? Last post there was over a month ago.
No. of Recommendations: 9
Wilco
In 30 years of Motely Fool boards, that's the first time I've seen wilco appear!
For those that are unfamiliar with the vernacular, WILCO is a radio reply, used mainly in the military as far as I can tell, which means "I understand, and WILl COmply."
As opposed to a response of "Roger", which simply means "I understand."
Tails
(A retired US Navy pilot)
No. of Recommendations: 8
Hey Jim -
Your comment about the sharp sell-off and potential capitulation makes me wonder whether you have ever developed a signal analagous to your major bottom detector for individual names?
Jim did not give out a "ring the bell" signal on DG....
...but a few days ago, he did post only one single entry on his website mungofitch.com in almost a year...and mentioned it here.
I thought I heard some ringing sound...but, for the sake of full disclosure, I do have mild tinnitis in my left ear :)
No. of Recommendations: 1
BREAKING NEWS!
Dollar General is hit with a bear call by JPMorgan due to the financial stress on core customers
07:40 AM | Dollar General Corporation (DG) | By: SA Editor Clark Schultz, SA News Editor
JPMorgan downgraded Dollar General (NYSE:DG) to an Underweight rating on Wednesday after having the discounter lined up at Neutral.
Analyst Matthew Boss and team see pressure on the stock given Dollar General's (DG) eroding market share, elevated investment philosophy, and continued execution risk with the new leadership.
Crucially, Dollar General's (DG) core low-end consumer are said to be at a recession stress point already given the combination of pandemic-related savings diminished in the summer, persistent inflationary pressures, and reduced government assistance due to the child tax care credit expiration and SNAP cuts. "Compounding matters, management sees excess savings for the middle-income cohort (HHI of $35K-$75K) on pace to be depleted by the end of Fall '23 citing potential for sequential worsening tied to student loan repayments," warned Boss.
Looking ahead, markdowns and increased promotions are seen as a risk for Dollar General (DG) as the pressure gets even more intense for its core customers.
JPMorgan cut its price target on Dollar General (DG) to $116 from $132. The new PT is 14X the firm's FY25 EPS estimate.
No. of Recommendations: 1
Only because i couldn't key my mouse (mic) twice to acknowledge... ;)
m
No. of Recommendations: 1
BREAKING NEWS!
Dollar General is hit with a bear call by JPMorgan due to the financial stress on core customers
07:40 AM | Dollar General Corporation (DG) | By: SA Editor Clark Schultz, SA News Editor
JPMorgan downgraded Dollar General (NYSE:DG) to an Underweight rating on Wednesday after having the discounter lined up at Neutral.
Seems this would've been a lot more profitable news if they made this call in Oct/Nov '22.
