Dollar Stores Could Bring Relief to Battered Portfolios

Dollar General Corporation (DG) just announced that it will hire up to 50,000 new employees to meet “heightened demand,” adding to similar headlines from Amazon.com, Inc. (AMZN) and Dow component Walmart Inc. (WMT) in recent days. The news is tracking the 2008 playbook, in which deep discount retailers outperformed major indices due to fears that wealth destruction would permanently shift market share to companies that cater to lower economic classes.

You’d think that shares of Dollar General and rival Dollar Tree, Inc. (DLTR) would be trading at new highs right now, but that isn’t the case. Both stocks have taken a beating in the past two weeks, with Dollar Tree dumping to a four-year low. However, it now looks like selling pressure is waning, with fearful investors slowly coming on board. Even so, big hits to underlying accumulation during the most recent swoon need to be overcome before these issues can lift into market leadership.

Dollar Tree stock topped out at a split-adjusted $16.08 in 2000 following a multi-year uptrend, marking a high that wasn’t challenged for the next nine years, ahead of narrow sideways action between that level and support at $5.00. A 2007 uptick stalled within 80 cents of resistancegiving way to an orderly downturn that found support at the 2005 low near $7.00 in January 2008. The stock rallied for the rest of the year, despite the October economic collapse.

Positive price action finally completed a round trip into the prior peak in 2009, yielding a breakout and powerful uptrend that stalled in the mid-$50s in 2012. The stock cleared that resistance level three years later, easing into a shallow rising channel that persisted into a March 2020 breakdown. The bounce in the past week has now reached resistance at the .382 Fibonacci sell-off retracement level in the lower $80s.

The monthly stochastic oscillator has just posted the deepest oversold technical reading in the stock’s public history, raising the odds that the bounce will continue in coming sessions. Even so, there’s no reason to get on board until bullish action remounts the broken channel and 50-month exponential moving average (EMA), which are narrowly aligned near $90. That process could take time, even though the stock might post blowout first quarter profits.

Dollar General shares performed well as a private company during the 2008 economic collapse, prompting the November 2009 initial public offering (IPO) in the low $20s. The newly minted stock traded in a relatively narrow range into 2010 and broke out, entering an uptrend that lifted into a rising channel in 2011. It held those boundaries into a 2016 breakdown, when investor appetites shifted back into growth issues.

The stock broke out once again in the second half of 2018, carving a strong uptrend that continued into October 2019’s all-time high at $166.65. It then eased into a trading range with resistance at that level and support at $150, breaking down in March and hitting a nine-month low last week. The bounce since that time has made limited progress, reversing at new resistance at the end of last week and again on Tuesday morning.

This issue is not nearly as oversold as its rival, with the monthly stochastic oscillator engaged in a long-term sell cycle that still hasn’t reached the oversold level. This bearish placement lowers the odds that it can remount resistance at $150 at this time, perhaps setting the stage for a test at the monthly lows. Even so, the bounce at the three-year trendline bodes well, raising the odds that the trading floor will end the downside.

The Bottom Line

Dollar Stores and Dollar General are well positioned to pick up market share in reaction to the pandemic, making the stocks interesting choices for battered portfolios.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.