So, Halloween was anything but scary in the markets.
On Wednesday, the S&P 500 rose (or recovered) 1.1% while Toronto was up 0.9%.
Notable winners included:
Amazon, up 4.4%
Visa, up 3.8%
TFI International, up 2.3%
CRH Medical, up 4.1%
Dollarama was a notable decliner, down 5.3% after a strong sell recommendation by what is probably a short-seller. I have no issue with short-sellers as long as they are giving their honest opinion. To me, it’s just the opposite side of bullish reports so often issued by various parties that have a vested interest in a stock going up. No one is required to sell when a stock declines due to a short-seller report and if they are wrong, the stock will recover.
The Short sellers made several points about Dollarama and I will address the main ones below:
Dollarama has abandoned its roots as a true dollar store: That’s true but Dollarama has been introducing higher points for years. Possibly they have gone too far with the $4.00 price point but prices higher than a dollar have been in place since I believe before the IPO. But maybe it is starting to annoy customers.
Costs are rising and there is going to be more competition and lower profit margins: Well time will tell. Dollarama has had incredibly juicy profit margins for years, at least ten years. In theory others should have moved in on the action. I often wondered why Walmart could not have been a formidable competitor by having dollar sections in their stores. Or why Zellers did not become giant dollar stores. So far, Dollarama has remained extremely profitable and appears to be the best-managed Dollar store chain in Canada and quite possibly has been better managed than the U.S. chains.
Accounting issues: The short-seller mentions profits on foreign exchange hedging. That certainly sounds like it would have been a temporary thing. They also rented some space from the founding family and then I believe recently bought some property from the founding family. Well, so far investors have done extremely well by this family. I too had noted the odd situation in which Dollarama has paid out more than all of its retained earnings and invested capital mostly in share buy backs. I have wondered for years if they were paying too high a price in share buy-backs. Well, until recently the share price just kept rising -driven by profit growth.
Their growth outlook is unrealistic: The short sellers don’t think the store count can grow as fast as Dollarama says. Well, yes it HAS to slow down at some point. Time will tell how much the store count will continue to grow.
Overall: There is no doubt that Dollarama’s earnings growth was going to slow down. That is mentioned in our Dollarama report. I would not count this stock down for the count. Our last update called it only Weak Buy but now the price is lower and it seems worth considering edging into this position. It’s still not cheap.