Whenever a stock surges to a new all-time high, some shareholders may naturally be inclined to ask themselves if it’s a good idea to ring the register. Undoubtedly, taking profits after a seemingly extended (perhaps even overextended rally) can be a good idea, especially if the fundamentals haven’t gotten much better since the rally began.
At the time of writing, shares of Canada’s top discount retailer, Dollarama (TSX:DOL), are starting to get overheated. Though I’d be tempted to sell with shares near a peak, I think that investors who do so may stand to miss out on further performance. When it comes to taking profits, investors must realize there’s the risk of being left out of a rally’s continuation.
At this juncture, I’d argue that Dollarama stock is getting a tad ahead of itself, now up more than 50% in the past year alone and over 80% in the last two years.
What’s behind the boiling surge?
Dollarama continues to win the business of many loyal Canadian consumers seeking super-low prices. Indeed, Dollarama’s strategy is simple and predictable.
Consumers just love a good deal
The company has outstanding direct sourcing deals and relationships with suppliers at home (think Canadian-branded snacks) and overseas (China and Vietnam, specifically).
Such impressive relations have helped Dollarama bring in goods at incredibly steep discounts. And it’s Dollarama’s willingness to share in on the savings that’s won it such a massive following in recent years. The past four years have been really tough on Canadian consumers, with the price of everything soaring while wages are barely budging higher. Whenever the amount of money that goes out (spending) surges while the money coming in (income) stays the same, or worse, falls due to recent layoffs in the tech and financial sectors, consumers need to cut spending accordingly.
Normally, it’s enough to cancel a few of those unused monthly subscriptions. But with inflation running rampant for many years now, some consumers have had to cut on utilities, food, and other necessities. Dollarama stands out to me as the best discount retailer on the continent. Why? The management team would rather keep prices as low as possible to attract repeat sales than obtain more margin from consumers.
Indeed, Dollarama could charge a nickel more for any one of its already cheap goods to add to margins. In many cases, it just doesn’t. With such a focus on maximizing consumer value over padding margins, it’s no mystery why Dollarama is soaring while other discount retailers are in a slump. Indeed, Dollarama has the magic formula, which should lead to predictable earnings growth over the next seven years or so as the firm grows its unit count.
Dollarama is expanding fast!
The company is steadily expanding, and as it aims to open its 2,000th store in 2031, I find DOL stock will likely be trading much higher than where it is today. At the in-store level, Dollarama gets top grades for offering a slew of great, affordable products that allow consumers to fill up their baskets without going into shock once they head to checkout.
The only question is whether the company can continue driving sales growth at this magnitude as disinflation or even deflation (don’t cheer for that, folks!) becomes a potential new reality a few years from now. I think Dollarama will do well, regardless of where prices, as a whole, are headed.
Why? Customers know they’re getting very competitive prices (at least for goods in smaller form factors) on everything over at Dollarama. All considered, I’d rather buy DOL stock than sell it right now.
