Dollarama Inc (TSX:DOL) hit a new 52-week low yesterday as the stock dropped more than 5% as Spruce Point Capital released a report stating that it believes the discount chain’s share price could drop by another 40%. It’s a big claim and seems a bit extreme considering that up until recently, Dollarama was achieving significant growth quarter after quarter.
While conditions may be getting more challenging as interest rates are rising and minimum wages are increasing, Dollarama has averaged a very strong 16% profit margin over the past five quarters. It’s showing no cause for concern just yet.
A decline of over 40% would put the share price at around $22 a share, a level it has not reached since early 2015. The company has come a long way since then, and it’s hard to see that big of a decline happening for no justifiable reason. For the stock to plummet to those depths, the company would have to severely underperform.
Investors shouldn’t give too much credence to what short-sellers say about a stock, especially since it would be to their financial gain if the share price goes on to decline in value. While Dollarama might be a little expensive at a price-to-earnings multiple of 23, it’s not that big of a premium considering its strong bottom line and the fact that it has been able to do better than other retailers under what have proven to be very challenging times for the industry.
Not only do I think Dollarama isn’t a strong sell, but it could be a great buy at this price.
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