How to Trade Shares of Dollar General, Dollar Tree Amid Deal Drama

NEW YORK (TheStreet) -- Shares of discount retailers Dollar General  (DG) and Dollar Tree (DLTR) set all-time highs this week. Each has traded as a momentum stock on speculation that it might emerge the winner in their battle to acquire smaller rival Family Dollar (FDO) .

Shares of all three discount retailers could be affected Thursday morning when Dollar Tree plans to report quarterly earnings. (On average, analysts expect the company to earn 56 cents a share.) 

None of the three companies has beaten earnings estimates in recent quarters, so these stocks may have outrun their upside potential.

Family Dollar has agreed to be acquired by Dollar Tree, although the acquisition still awaits approval by federal regulators and Family Dollar's shareholders. Family Dollar just postponed its shareholder vote to Dec. 23 from Dec. 11. Meanwhile, Dollar General has pushed ahead with a hostile offer valued higher than Dollar Tree's deal.

Family Dollar has rejected Dollar General's bid multiple times, saying that antitrust regulations might imperil a transaction. Dollar General's stock was slumping Wednesday morning after the New York Post reported the company would have to divest as many as 4,000 of its own stores in order to get a deal approved by the Federal Trade Commission.

Amid all the deal drama, here's how to trade Dollar General, Family Dollar and Dollar Tree.

Dollar General ($66.17) set an all-time high at $66.21 on Tuesday. Investors should enter a good-'til-canceled limit order to sell strength to a key technical level at $69.60 and employ a sell-stop below its key weekly moving average at $63.33, keeping in mind that this average will rise each week.

Family Dollar ($78.85) set an all-time high at $80.97 on Sept. 2. Investors should enter a good-'til-canceled limit order to sell strength to a key technical level at $84.85. If you are concerned that the company's purchase by Dollar Tree won't go through, you should book profits now. This discounter missed earnings estimates four quarters in a row.

Dollar Tree ($61.99) set an all-time high at $62.72 on Monday, and the earnings bar is high as the company missed analysts estimates with two of the last three quarterly earnings reports. Investors should enter a good-'til-canceled limit order to sell strength to a key technical level at $68.30 and employ a sell-stop below its key weekly moving average at $59.57, keeping in mind that this average will rise each week.

Here's the daily chart for Dollar Tree.

Courtesy of MetaStock Xenith

The daily chart for Dollar Tree ($61.99) shows that the stock traded as low as $53.70 on Oct. 15, holding the 200-day simple moving average (green line) at $53.18. From this key test of momentum the stock rallied 17% to an all-time intraday high at $62.72 on Monday.

Here's the weekly chart for Dollar Tree.

Courtesy of MetaStock Xenith

The weekly chart for Dollar Tree shows that the 200-week simple moving average (green line) has been the staging area from which to buy the stock since April 2008 when the average was trading at $9.61.

The weekly chart is positive but overbought with its key weekly moving average at $59.57. The momentum reading shown in red at the bottom of the graph has risen into overbought territory with a reading of 84.51 above the overbought reading at 80.00.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates DOLLAR TREE INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate DOLLAR TREE INC (DLTR) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, notable return on equity, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

You can view the full analysis from the report here: DLTR Ratings Report


TheStreet Ratings team rates DOLLAR GENERAL CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate DOLLAR GENERAL CORP (DG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, growth in earnings per share, increase in net income and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

You can view the full analysis from the report here: DG Ratings Report


TheStreet Ratings team rates FAMILY DOLLAR STORES as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate FAMILY DOLLAR STORES (FDO) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures, increase in stock price during the past year and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: FDO Ratings Report

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