Discount retailers have been one of the best performing sectors in the market during what's been a disappointing 2008 for investors.With that in mind, I was surprised to see that Dollar Tree ( DLTR) was upgraded from neutral to overweight Monday by JPMorgan. The stock closed Wednesday at $35.63, up some 32.5% year-to-date. The analyst cited the company's above-average same-store sales growth trends and solid balance sheet. Even so, Wall Street has a lukewarm attitude toward the stock, with just six Buy ratings compared with six Holds, according to Bloomberg. With that in mind, I'm here to answer readers' questions: Should you buy it? Is it too late to get into the game with Dollar Tree, or can the stock continue to move higher?
That said, I believe it will be difficult for any retailer to expand in the current environment. And Dollar Tree isn't alone in the industry competing head-to-head with other sizable chains with Family Dollar ( FDO), 99 Cents Only ( NDN) and the privately held Dollar General. Dollar Tree has outperformed both of its publicly-traded competitors year-to-date, and with a 25% total debt/common equity ratio, the company also utilizes more financial leverage that either of its peers. At current levels, Dollar Tree is valued at 14.7 times expected full-year earnings of $2.43 a share. While this represents a 22% premium to the benchmark S&P 500 index, the stock is trading below its own historical average valuation over the past year. At the end of the day, I believe that readers should avoid shares of Dollar Tree at current levels, though the stock would look more attractive on a pullback below $30. The company is taking a big risk both investing in infrastructure and continuing to grow its store base in this economic environment. That's because even though the company and its peers are seeing consumers trade down for food and personal items, I believe that marketing spending could increase in the coming quarters, especially if Wal-Mart (WMT:NYSE) decides to throw its weight around and move even lower down the pricing scale. Check out David Peltier's Value Investor for more stock picks that he believes can better weather today's economic down swing. Along with his recommendations, you will also have access to his model portfolio and his expertise on position management and exit strategies -- essentials in successful value investing.
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