Dollar Tree, Inc. (NASDAQ:DLTR) declined more than 14% last week as a disappointing earnings report sent the stock over a cliff. Although the company’s sales were up 5% year-over-year, they missed analyst expectations. Earnings were down 20% from last year as per-share earnings also fell short of what investors were hoping for.
Year-to-date the stock is now down 24% and although it is not near its 52-week low of $65.63, it has fallen into oversold territory. The Relative Strength Index (RSI) measures the average gains and losses of a stock, typically over the past 14 trading days. The more significantly that losses outweigh gains, the lower the RSI number is, and when it falls below 30 it becomes oversold, suggesting that a reversal may be on the way.
After the earnings results were released, the immediate sell-off sent the stock into oversold territory and as of the end of trading on Friday, Dollar Tree was at an RSI of just 22. The last time the stock was oversold was back in March when it fell to under $90, and it would eventually rise back up to over $100 before declining again.
I would never recommend relying solely on a technical indicator to determine whether to buy or sell a stock, but sometimes it can help alert you to a good buying opportunity. In the case of Dollar Tree, it looks to be just that.
The company has strong fundamentals and with a price-to-earnings ratio of only 12 and a price-to-book multiple of 2.6, it’s a good value buy that trades at a discount compared to its peers.
