3 Reasons to Buy General Stocks with Dollars Like There’s No Tomorrow

It’s been a year to forget Dollar General (NYSE:DG) Shares of the discount store giant are down 40% in 2024. The company struggled to manage the changing macroeconomic environment, evidenced by weak sales and declining earnings.

The headlines don’t inspire much confidence, but considering the various reasons to remain optimistic that Dollar General can bounce back in 2025, shareholders should think twice before raising the white flag of defeat. Let’s look at three of them.

1. Still profitable with positive growth

Dollar General operates 20,345 stores with a convenience store concept specializing in daily household needs. One of the challenges this year has been the dynamic of low-income customers feeling “financially constrained” by the cumulative impact of high inflation and rising borrowing costs. Management cited these negatives to explain the weak results.

In the last reported third quarter (ended Aug. 2), Dollar General missed expectations, with same-store sales rising just 0.5% year over year. Slightly lower operating margins reduced earnings per share (EPS) to $1.70, down 20% from the prior-year quarter.

Another negative for the stock was the muted guidance for the full year. Dollar General expects same-store sales to increase 1% to 1.6% in 2024, compared to a previous forecast of 2% to 2.7%. Similarly, the company forecasts EPS to be in the range of $5.50 to $6.20, compared to the previous midpoint target of $7.18.

The trends here are not great, but the big picture is that Dollar General remains profitable and continues to generate positive growth. Beyond the selling wave in stock prices, fundamental indicators are stable and open to improvement. A stronger outlook for 2025 could be the first step towards the stock’s rise.

Image source: Getty Images.

2. Well positioned for return

Dollar General’s main theme this year is its “Back to Basics” strategy to refocus on core strengths and create value for shareholders. The company plans to invest in its workforce to reduce employee turnover, address supply chain constraints and optimize inventory efficiency. For its customers, Dollar General is realigning its product mix with competitive pricing in mind to drive growth.

Ultimately, I believe the plan can work with a variety of tools that management can use to support sales and margins. The ability to align ongoing store expansion to new locations in the most attractive markets or gain greater penetration into product categories that customers seek can provide greater financial stability.

According to Wall Street estimates, Dollar General’s EPS will rebound 7.8% to $6.30 next year, with revenue up 4.8%.

Evidence that results are moving in this direction will help generate positive market sentiment as a catalyst for the stock to move higher. I also expect the operating environment to benefit in 2025 as the Federal Reserve begins lowering interest rates, which could push consumer spending into a new cycle of economic growth.

Data source: Yahoo Finance. YOY = year over year.

3. Bargain valuation

I feel the sell-off in Dollar General’s shares has been overdone, causing shares to trade undervalued at 14 times 2024 consensus EPS as a forward price-to-earnings (P/E) ratio.

Notably, this level marks a deep discount to the average historical earnings multiple and a large gap relative to industry peers. Walmart forward P/E ratio is at 50 and Costco Wholesale at 34. Although Dollar General has underperformed the group this year, its stock stands out as a cheap commodity in the sector.

Compared to smaller competitors Dollar TreeDollar General, which trades at a similar level of 13 times 2024 earnings, has driven stronger same-store sales and currently pays a regular quarterly dividend that yields 2.9%. Overall, the stock appears to be selling, assuming the long-term outlook remains intact.

DG PE Ratio (Forward) data Y Charts

final thoughts

Dollar General has gone through a reset of expectations. Today’s opportunity is to buy shares in this beaten industry leader who can still turn things around. Knowing that the company still has a lot to prove in what will be a critical year in 2025, I believe Dollar General shares deserve a buy rating and could work for investors within a diversified portfolio.

Don’t miss this second chance at a potentially lucrative opportunity

Have you ever felt like you were missing out on buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our team of expert analysts publishes a report. “Double Down” stock Advice for companies they think are about to implode. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: If you invested $1,000 when we doubled down in 2010, You would have $22,469!*

• Apple: If you invested $1,000 when we doubled in 2008, You would have $42,271!*

• On Netflix: If you invested $1,000 when we doubled down in 2004, You would have $411,970!*

We’re currently issuing a “Double Down” warning for three incredible companies, and another chance like this may not come anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 4, 2024

DanVictor It has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Target and Walmart. The Motley Fool has a feature disclosure policy.