Shares of the discount retailer jumped because of company's solid first-quarter earnings Thursday. While the mall retailers are struggling, consumers are being more frugal and that benefits discounters such as Dollar Tree.
However, despite the company's strong fundamentals the stock is no longer attractive.
The stock is now priced at a price-to-earnings multiple of 70, which is more than three times the P/E of 21 in the S&P 500 (SPX) index. Based on forward estimates of $3.68 per share, DLTR is still at a premium P/E of 24, which is seven points above the S&P 500. Technically, DLTR stock will need to correct by about 7% or to around $82 per share before it moves higher. Consider the chart below, courtesy of TradingView.
Dollar Tree shares are up almost 15% so far on the year, outperforming the 2.5% rise in the S&P 500 index. From the chart above, you can see the up/down pattern the stock has created since the beginning of the year, recording peaks and valleys with each report on consumer spending. The pattern is poised to continue, meaning now is the optimal time to lock in some gains.
With DLTR now trading at 52-week highs and above all three critical moving averages, there is now more downside risk than potential gains. The 12.77% gap of the stock between Wednesday's and Thursday's close is poised to get filled. DLTR will retest support at about $82 (blue arrow) on its way there. A decline to $82 would translate to a 7% move as the stock attempt to consolidate back toward its moving averages.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.