Today’s News: Dollar Tree (DLTR) reaches medium-term upside price resistance, and how to trade Schnitzer Steel (SCHN).
Make a Decision on Dollar Tree (DLTR)
DLTR rose to 89.4 this morning, retracing its most-recent high of 89.67 from November 2016. It’s time to choose between “Door Number One” and “Door Number Two” (God bless Monty Hall). Let’s review the investment scenario:
GOOD: EPS are expected to grow 23.8% in fiscal 2018 (January year-end). What’s more, the 2018 earnings estimate has been rising steadily for seven months. That’s bullish!
GOOD: The 2018 P/E is 18.9, lower than the earnings growth rate, indicating undervaluation.
BAD: EPS are expected to grow 9.8% in 2019. That’s a much slower EPS growth rate than we’re seeing in the current fiscal year, although certainly it’s a decent number. Always keep in mind that slower EPS growth rates will push away aggressive growth investors, so there’s potential selling on the horizon.
BAD: The 2019 P/E is 17.2, much higher than the EPS growth rate, indicating overvaluation. That number could also push away value investors.
GOOD: DLTR has growth and value numbers that are far more attractive than those of most retail stocks.
GOOD: Dollar Tree’s customers are extremely unlikely to move their spending dollars to Amazon. Since Amazon’s competitive threat has put a black cloud over retail companies, it’s a slam-dunk investment for portfolio managers to buy a retail stock that’s (a) more profitable than its peers and (b) not in competition with Amazon. This darling of Wall Street could continue rising, despite the red flag of the stock’s fiscal 2019 valuation.
GOOD: Most portfolio managers need to have a presence among retail stocks, and DLTR is an obvious good choice.
GOOD: The company’s long-term debt-to-capitalization ratio rose to 62% after its July 2015 purchase of Family Dollar Stores. Since that time, the debt ratio has fallen to 49%. That gives investors confidence that the company has a focused intention to pay down debt and enough cash flow to accomplish it. In tandem with the debt repayment, Moody’s Investors Service raised Dollar Tree’s debt ratings in March 2017.
The price chart might be your deciding factor in whether to hold or sell DLTR. As I mentioned, we’ve reached medium-term price resistance at 89 today. If you need cash for any reason—expenses, or other, more preferable investments—sell DLTR. If you’re a cautious investor and prefer to lock in gains, sell DLTR.
The stock traded as high as 98 in August 2016, and the market loves the stock. It might only pause briefly at 89, then continue climbing toward 98. If you’re a more bullish or aggressive growth investor, hold DLTR for additional gains. Use a stop-loss if you’re worried about the downside.
I will hold the stock in the Buy Low Opportunities Portfolio with the expectation that DLTR will rise toward 98 in the coming months. HOLD.
How to Trade Schnitzer Steel (SCHN)
I recommended the sale of SCHN yesterday in the October issue of Cabot Undervalued Stocks Advisor. The stock subsequently fell today due to the selling pressure. I realize that many investors who intended to sell have not yet done so. I would expect the stock to rise again in the coming days, so if you are trying to sell closer to 29, you will probably have the opportunity quite soon. SELL.