Shares of the Goodlettsville, Tenn., dollar-store chain have surged more than 50% on a total-return basis over the trailing 12 months – and, of that, the rise has been double digits since the calendar flipped to 2020.
That’s a stark contrast to the average S&P 500 component, which is down over the past year and down even more in 2020.
In a lot of ways, Dollar General is the perfect stock to own during this current round of economic uncertainty: It’s benefitted from a retail push as more consumers stay stuck at home, and it offers downside protection thanks to its deep discount status.
(The latter point explains why shares of dollar-store chains rallied during the 2008 financial crisis.)
Investors get their next glimpse at Dollar General’s performance on Thursday, when the company reports for its fiscal first quarter.
On average, Wall Street is looking for earnings of $1.74 a share, reflecting nearly 18% growth from the year-earlier quarter.
Heading into the earnings report, Dollar General is hovering at all-time highs. And the shares could have further to go from here.
Simple as it seems, buying what’s working is a sound strategy during crisis-market environments.
A review of crisis-investing environments over the past 3 1/2 decades shows that stocks that have positive six-month relative strength saw a 78.4% chance of a positive one-month forward return.
That’s about a 50% higher future win rate than the average S&P 500 stock.
Now, with Dollar General verging on breakout territory as the earnings approach, it makes sense to take a closer look at the chart:
At a glance, the Dollar General chart looks constructive. The shares have been testing a breakout above the $185 resistance level since mid-April, and they’ve been absorbing the excess supply of shares above that level ever since.
The pattern in play in Dollar General right now is a pretty textbook example of an ascending triangle setup. The buy signal comes on a confirmed breakout above $185.
Relative strength, the indicator down at the bottom of the chart, has been making its own series of higher lows. That indicates that DG continues to systematically outperform the rest of the broad market, even now.
Currently, option volatility implies around a 7% one-day price reaction to the first-quarter earnings. That’s enough to send the shares definitively into breakout territory without getting overextended.
From a risk-management standpoint, it makes sense to wait for the initial reaction to earnings before taking this trade.
A meaningful push through $185 opens the door to more upside for Dollar General in June.