Dollar General Stock Is Popular. Why That Could Be a Problem.

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It’s another dismal day for the market, leading investors to flock to perceived havens, such as

Dollar General
,
which is trading slightly higher this morning.

The stock’s popularity means that the best gains may already be behind it, warns

Citigroup
.
However, Gordon Haskett argues investors are right to pile in, as more consumers trade down to the discounter.

The dueling opinions highlight how investors are struggling to handicap even retail winners as worries about an economic slowdown and a weaker consumer hang over the industry.

Citi analyst Paul Lejuez cut his rating on Dollar General (ticker: DG) to Hold from Buy on Thursday, as the stock is closing in on his $258 price target.

“While Dollar General is a defensive stock to own in an uncertain environment, trading at 14.1 times fiscal 2023 estimated earnings before interest, taxes, depreciation and amortization (EBITDA), we believe many appreciate its defensive characteristics,” he writes. Moreover, “as one of only 2 stocks that is up on a three-, six- and 12-month basis (BJ’s Wholesale Club Holdings (BJ) is the other), expectations seem high and upside seems more limited from here.”

Dollar General said earlier this week that its CEO is retiring, to be replaced by company veteran and current Chief Operating Officer Jeffery Owen. For his part, Lejuez thinks “the transition will be smooth,” and that didn’t factor into the downgrade.

He continues “to believe Dollar General is well-positioned in the current retail landscape both near term and long term,” with his concerns more focused on the stock’s valuation and ability to keep rising after it has already notched a nearly 5% gain this year, a period that has seen the

S&P 500
drop 22%.

By contrast, Lejuez kept a Buy rating on

Dollar Tree

(DLTR), as he hopes the new leadership could help its troubled Family Dollar division, and the shares have more upside left.

“We believe Dollar Tree cleaning up its executive suite is positive change that will result in a better managed organization,” Lejuez said.

However Gordon Haskett analyst Chuck Grom upgraded Dollar General to Buy from Hold today, with a $280 price target.

He argues that the company hasn’t yet seen the benefit from middle-income consumers trading down amid inflationary pressures, which should become more evident later this year and in early 2023. Indeed, his talks with management confirmed that any meaningful amount of trade down isn’t yet embedded in the company’s guidance, leaving room for upside.

In addition, Grom’s research points to Dollar General holding prices steady nearly on par with

Walmart

(WMT), emphasizing the value proposition for cash-strapped shoppers.

Write to Teresa Rivas at [email protected]