Here is a concept that is very important in the market—and I even saw it at work just last week when the Dow Jones Industrial Average (DJIA) finally kicked out three old duds.
Many times I look at portfolios that are transferred to me and see a similar situation—I see a portfolio that is full of stocks of yesteryear. Well, I personally would rather own the Best Stocks Now™, not of yesteryear!
I will illustrate this point by using the analogy of Wal-Mart (WMT), a behemoth out of Bentonville, Arkansas. There’s probably a Walmart within driving distance of your home and you’ve probably visited it within the last 30 days. Walmart is everywhere! The problem is, it’s gotten so big that it eventually becomes a math problem.
Now I’m a mathematician, a number cruncher—numbers are very important to me. I’d much rather see the numbers of a company, than a CEO flapping his mouth on the news telling me how good his company is. My point is that at one time, Wal-Mart was a great stock!
But today it is no longer a double-digit grower-it is a single-digit grower.
Wouldn’t you have liked to have bought Wal-Mart in the early days? Back when it was a Best Stocks Now ™?
So I look for companies today that are like WMT was in its early days; WMT was once a fast-growing company that was filtering in across America and still had room to grow!
Much like Dollar Tree (DLTR) is doing today! Dollar Tree (DLTR), a stock that I wrote about back in 2011 in my book Best Stocks Now!™ Companies such as Dollar Tree have exploding earnings, are performing way better than everyone else, AND they’re STILL undervalued!
Stocks like this may never end up in the Dow Jones Industrial Average, but it if can from say its current market cap of $12.8 billion to $20 billion, I would be OK with that. I have already made 142% in the stock once.
The first time around with DLTR, I more than doubled my money. Then the shares started to cool off and I moved on. Well it started heating-up again earlier this year so I got back in, and it’s on the move once again!
DLTR is a stock that I currently own in my conservative growth accounts. It is a $12 billion company—a little, tiny, large cap stock. By contrast WLMT is a mega cap stock at $244 billion.
Let’s take a quick look at the performance of DLTR by looking at my Best Stocks Now! App. Over the last five years, DLTR has averaged 35% returns to investors per year. Over the last three years DLTR has delivered 32% per year. Over the last 12 months DLTR is up 19% and it’s starting to outperform the market again!
Now let’s go back to 2008 when the market was down 38.5%. DLTR was up 61% that year! So what ranking do you think it would have had in 2008 (my app wasn’t functional then)? But I know that it would have been a top rated stock that year! It is all relative!
DLTR’s performance has been sensational. Now, just for fun, let’s compare its performance with that of Wal-Mart.
Over the last one, three, and five years, DLTR has been cranking out about 30 to 35% returns to investors. WLMT, on the other hand, has been cranking out only about 6% per year. It’s all about earnings growth!
Earnings growth translates into stock price appreciation. When earnings start to slow down at a company and it’s no longer hitting double digits, no matter who you are, the stock price appreciation is going to follow right along. This is why you have to be invested in the Best Stocks NOW™, not big recognizable names of yesteryear.
Walmart was once a Dollar Tree—it was growing rapidly. And now you ask yourself ‘Why didn’t I get on the Walmart bandwagon in the early days?’ Well, I’m giving you all these stocks on a daily basis that are in the early days NOW!
Too many people follow the rule of avoiding stocks that are hitting a new highs. In fact, just the other day someone asked me why I would buy a stock (like DLTR) that is just hitting new highs. Well DLTR has been hitting new highs for the last ten years! You’d never buy this stock if you followed that rule!
I would rather own a stock that is hitting new highs than one that is going sideways.
I would rather own a stock that is hitting new highs than one that is going down.
I would rather own a stock that is hitting new highs that one that is hitting new lows!
This is where valuation comes into play.
Dollar Tree is currently trading at 17 times forward earnings which is a slight discount to the market. It’s expected to grow those earnings by 17%, so it has a PEG ratio of 1.01.
All things equal, you should get 17% per year in returns on DLTR going forward. It’s simple math, but that doesn’t necessarily mean there’s a guarantee. You still have to babysit that holding every day to make sure it’s staying on track.
Now every once in a while the stock is going to be derailed a little bit. But as long as it stays on course, stay with it. You want big gains in the market. If it goes of course, you sell.
Dollar Tree is currently a stock that is exhibiting to those of Wal-Mart many years ago.
So would I buy a stock that is hitting a new all-time high? So far we’ve discussed the performance and valuation of DLTR, but the last part is checking that stock chart.
Yesterday DLTR broke out to a new all-time high. If the valuation justifies it, and in DLTR’s case it does, I would absolutely buy a stock that is hitting a new high!
So, it’s your choice—you could own a big, stodgy, old stock of yesteryear, or you could drop down a notch into the second or third tier and shop around the aisles of the stock market that still offer big potential.
DLTR comes in at #83 out of 3,546 stocks. Clients of Gunderson Capital Mgt. are currently long the stock.
Please follow me on Twitter @billgunderson for a change in my opinion of the stock.