If you’re a long-term investor employing the buy-and-hold strategy, it’s essential to find the highest-quality stocks to buy, and not necessarily the cheapest stocks on the market. And Dollarama (TSX:DOL) has easily been one of the best stocks in Canada for more than a decade now, growing at an unbelievably fast and consistent pace.
In fact, in the last 10 years alone, Dollarama stock has grown investors’ capital at a compounded annual growth rate (CAGR) of 21.6%. And since the start of 2010, it has grown investors’ capital at a CAGR of 26.7%. That means if you had invested $5,000 in Dollarama at the start of 2010, it would be worth more than $122,000 today.
In addition to its impressive past performance and continued growth potential going forward, Dollarama has also been one of the few stocks gaining value in the last year and few companies benefitting from a weaker economic environment.
But with Dollarama currently trading at roughly $86 a share, less than 5% off its 52-week high, is now the right time to buy the impressive growth stock?
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Dollarama stock is one of the best growth stocks on the market
The fact that Dollarama trades at a sky-high valuation isn’t necessarily new. In fact, for years, Dollarama has looked expensive.
As of Wednesday’s close, Dollarama traded at a forward price-to-earnings (P/E) ratio of 26.3 times. That’s certainly high for a retail stock, especially a large-cap stock with a market cap of more than $24 billion.
However, although Dollarama stock looks expensive, it has earned its growth premium when you consider that for more than a decade now it has grown investors’ capital at a CAGR of more than 20%.
Furthermore, it has demonstrated it can consistently execute its goals and show what an excellent industry it operates in.
There is never a shortage of consumers looking to save money on essential goods, and Dollarama has done an impressive job of building its brand, continuously improving its merchandising and scaling its business to consistently grow its profitability.
Plus, the discount retailer continues to open new stores each year. With inflation sending prices soaring over the last year and now the strong likelihood of a recession on the horizon, Dollarama has significant organic growth potential both in the short and long term.
Is Dollarama overvalued today?
Even with all of Dollarama’s potential both in the short and long term, if you’re thinking of buying the stock it’s certainly important to ensure that it’s not overvalued with the shares trading just off their 52-week high.
However, although Dollarama trades at more than 26 times earnings, a valuation that seems lofty, it’s actually right in its historical range.
Over the last 10 years, Dollarama stock has had a forward P/E ratio as low as 16.6 times and as high as 34.6 times with an average of 25.2 times.
Furthermore, in the last year, as it has been one of the few stocks benefitting from the current environment, its valuation has unsurprisingly increased, and it has averaged a forward P/E ratio of more than 27 times.
So if you’re considering adding Dollarama stock to your portfolio, the stock looks fairly valued today. It’s certainly not undervalued, but it’s not overvalued either.
Therefore, should the stock pull back at all in the near future, I would certainly consider the opportunity to gain exposure.
