Is It Too Late to Buy Dollarama Stock?

Dollarama stock (TSX:DOL) is up a whopping 48% in the last year, but growth is slowing for this great low-cost retailer.

| More on:
clock time

Image source: Getty Images

Dollarama (TSX:DOL) has left its double-digit days behind it. The low-cost retailer climbed past the three-digit mark earlier this year and has continued to fly past all-time highs. But with earnings around the corner, the question becomes whether this can continue. So, is it too late to buy Dollarama stock?

Value

First off, let’s look at whether Dollarama stock offers the value it once did. Dollarama is currently trading at 27.5 times forward earnings, which is a fair amount higher than its five-year average. This elevated valuation indicates that the market has already priced in much of the expected growth and positive performance. 

Analysts note that there is a low likelihood of further valuation expansion from current levels and expect the shares to be range-bound in the short term. Several analysts also highlighted that Dollarama stock is trading at a significant premium over its historical averages. 

For instance, it’s trading at a 13% premium over its historical average, making it expensive compared to its past performance to say the least.

Growth is decelerating

Beyond its value today, the company could also experience slowing growth in the future. Dollarama stock’s guidance for Fiscal 2025 projects comparable store sales growth of 3.5% to 4.5%, a significant slowdown from the double-digit growth seen in the past two years. 

This deceleration is a natural progression after exceptional growth periods, but it suggests that the rapid expansion phase might be tapering off. This could limit upside potential for new investors.

Furthermore, the reported decline in average transaction size for the fourth quarter, despite an increase in the number of transactions, indicates a potential shift in consumer behaviour towards purchasing lower-priced items. This could impact revenue growth if the trend continues.

The market

Then there’s the market itself and the overall sentiment we’re experiencing right now. Analysts warned of potential sector rotation. This is where investors might move their funds from defensive growth stocks like Dollarama stock to more cyclical names. Especially if economic conditions improve or interest rates start to decline. 

This could result in a contraction of Dollarama stock’s valuation multiples. And as said, with many analysts adjusting their price targets to levels that suggest limited upside, there is a consensus that Dollarama stock appears fully valued.

Bottom line

So, despite Dollarama stock’s impressive performance over the past year, reflected in a 48% climb to all-time highs, several factors suggest that it may be too late for new investors to buy into Dollarama stock.

Certainly, Dollarama stock has demonstrated strong financial and operational performance, leading to significant stock price appreciation. However, the current high valuation, expected slowing growth, and risks of sector rotation indicate that the potential for substantial future gains is limited. 

Therefore, for investors looking to buy in now, it might be too late to achieve significant returns on Dollarama stock given the current market conditions and future growth projections. But as always, do your own research and consider whether Dollarama stock could still be right for your own risk tolerance and portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

hand stacks coins
Dividend Stocks

The Smartest Dividend Stocks to Buy With $400 Right Now

The market is full of dividend stocks to buy. Here's a look at two options that cater to both growth…

Read more »

space ship model takes off
Top TSX Stocks

My 5 Favourite Stocks to Buy Right Now

There are plenty of great stocks on the market. Here's a look at my favourite stocks to own for growth…

Read more »

Close up of an egg in a nest of twigs on grass with RRSP written on it symbolizing a RRSP contribution.
Dividend Stocks

3 Evergreen RRSP Stocks Every Canadian Investor Should Own

If you're looking into RRSP stocks, it's quite likely you've come across these on many, if not all, of the…

Read more »

woman looks out at horizon
Stocks for Beginners

3 Beginner-Friendly Stocks Perfect for Canadians Starting Out in November

Are you looking for some of the best beginner-friendly stocks to line your portfolio? Here's a trio of picks to…

Read more »

up arrow on wooden blocks
Tech Stocks

The 3 Smartest Tech Stocks to Buy With $500 Right Now

Tech stocks can be seen as a bit risky, but these three have far less risk and more stability for…

Read more »

shopper buys items in bulk
Dividend Stocks

Where to Invest $7,000 in November

This consumer staples company provides consistent stock performance alongside a dividend.

Read more »

A worker gives a business presentation.
Stocks for Beginners

Is TMX Group Stock a Buy, Sell, or Hold for 2025?

There are a lot of items to consider when looking at TMX Group as an investment. Today, let's get into…

Read more »

man shops in a drugstore
Stocks for Beginners

3 Consumer Stocks That Canadians Need to Watch in November

Consumer staple stocks could turn these stocks even higher with the holidays coming up.

Read more »