Retailer’s Major Uptrend Signals More Profits Ahead
One of my favorite types of stocks is those that have recently hit new all-time highs. That’s because with no overhead resistance in their path there is nothing to stop them from moving even higher from a technical perspective.
And when that stock has an upbeat fundamental outlook to support the strong technical picture, I know I have likely found a winner.
That’s why I’m enthusiastic about Dollar General (NYSE: DG), the largest U.S. discount retailer by store count. The stock is in a powerful uptrend, making new high after new high this year.
A quick note before we get to the trade: Many investors are reluctant to buy stocks near 52-week highs, regardless of any positive news or information about the company. This is due to “buy low, sell high” conditioning. Yet, there is proven reason why this is a huge mistake. If you’re serious about momentum investing, there is a presentation I think you should see.
Dollar General — which sells everything from A to Z (apparel to Ziplock bags) — has over 12,000 stores in 43 states.
Already a household name, Dollar General continues to grow. In 2015, the company plans to open at least 730 new stores, a 6% increase in its square footage, and relocate or remodel 875. In 2016, management said its goal is to expand square footage by 7%.
Strong customer demand helped the company grow revenue 8.8% year over year in fiscal Q1 to $4.9 billion. Earnings jumped 16.7% to $0.84 per share, while same-store sales increased 3.7% over the same period a year ago.
Management expects to deliver solid full-year results, recently confirming their optimistic guidance for fiscal 2015. They expect 8% to 9% growth in revenue, with same-store sales increasing 3% to 3.5%. Diluted EPS is expected to be at least 10% higher at $3.85 to $3.95.
Management has also been committed to rewarding investors with share buybacks. Since December 2011, the company has repurchased 51.5 million shares, including just over 7 million in the first quarter of 2015. There is roughly $700 million left in the current authorization, which means it could buy back another 8.9 million at current prices, or about 3% of the shares outstanding.
Turning to the chart, we see that the current uptrend started almost a year ago in July 2014 at just above $53.
In a little more than a month’s time, shares gained more than 20%. They were stopped by resistance just under $65, which was established in June 2014. DG then declined to around $57 by October, rallied and completed a base in November.
With the completion of the base, the stock advanced rapidly, moving to a high above $71 in December. Shares then consolidated their gains, moving sideways until March.
From here they rallied, peaking just under $77 in April. And again, there was a period of consolidation with the small pullback resulting in the major uptrend line being tested several times in May.
DG hit a new all-time high this week at $78.93, and since old resistance should become new support, we can expect buying interest around $77. The current uptrend line intersects the chart just under $75, which is where I will place my stop-loss.
With no overhead resistance on the chart, shares appear poised to move higher. The median target of 22 analysts covering the stock is $85, 8% above current prices.
Given the positive technical and fundamental outlook, I plan to go long on this discount retailer.
Recommended Trade Setup:
— Buy DG at the market price
— Set stop-loss at $74.89
— Set price target at $84.99 for a potential 8% gain by Q4 2015
This article was originally published on ProfitableTrading.com: Retailer’s Major Uptrend Signals More Profits Ahead