Don’t look now but Dollarama Inc. (TSX:DOL) stock just became more attractive through the eyes of prospective beginner investors after following June’s three-for-one stock split.
Stock splits are generally perceived as a positive event. In theory, it allows for a marginally higher degree of liquidity and opens doors for smaller retail investors who may wish to purchase a larger number of shares for a fixed amount of principal.
What the share split really means for prospective investors
It’s a common fallacy that stock splits are a positive event for a company. It’s actually a neutral event, as you’re not getting more bang for your buck even though it may seem like this to some beginners.
Sure, you’ll be able to own three times as many shares with the same amount of principal before the three-for-one split, but this means absolutely nothing when it comes to expected returns going forward. New investors ought to think in percentage terms, not about the number of shares they can own because like it or not, you’ve got the same amount of skin in the game before after a split than before one.
For many beginners, stock splits may seem like an opportunistic time to load up on shares of a company, but at these levels, I’d argue that it’s one of the worst times to be jumping into the stock.
Not only are Dollarama shares expensive, but the Canadian dollar store market is about to become considerably more crowded over the next few years with promising discount retailers like Miniso, Thinka and Daiso that could be breathing down Dollarama’s neck.
One may think that dollar stores have always been a dime a dozen given that there were never any barriers to entry, but you’d be wrong.
Over the past decade, Dollarama become a standout player in the Canadian discount store market because of its firm $4 price cap and its promise of value. The firm has fantastic relationships with suppliers and can keep prices low for its customers rather than beefing up its margins. No other big-chain Canadian dollar store has been able to support the same value proposition, thus allowing Dollarama to become a monopolistically dominant player in the Canadian discount store scene.
Looking ahead, Asian discount retailer Miniso is planning to expand to 500 Canadian stores, many of which are likely on Dollarama’s turf. Daiso, a massive Japanese dollar store with a location in Richmond, B.C. may decide to forego an aggressive Canadian expansion of its own in the future. If that happens, Dollarama’s competitive edge would stand to go up in a puff of smoke.
Foolish takeaway
Don’t be fooled by the stock split. Investors should treat it as a non-event and instead focus on the rising level of competition in the Canadian dollar store scene. At this point, Miniso looks like a serious threat, and if Daiso (or Thinka) were to announce an aggressive Canadian expansion plan at some point, I suspect Dollarama shares could get hammered.
Stay hungry. Stay Foolish.
