Avoid Dollar Tree stock in discount retail sector: Strategist

On Wednesday's Good Buy or Goodbye segment, Freedom Capital Markets Chief Global Strategist Jay Woods joins Market Domination host Julie Hyman to do a price check on his previous retail sector call.

Costco (COST) remains Woods' "good buy," highlighting the company's strong technicals, consistent earnings, and attractive fundamentals. However, Woods concedes that the stock is historically expensive, given its high P/E ratio. On the other hand, Woods says "goodbye" to Dollar Tree (DLTR), pointing to its negative price action and competitive environment as big retailers lower prices.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This article was written by Gabriel Roy

Video Transcript

It's a big noisy universe of stocks out there.

Welcome to, goodbye or goodbye.

Our goal to help cut through that noise to navigate the best moves for your portfolio today, we're doing a price check on retail with the goodbye or goodbye score card back with us is J Woods Freedom Capital Markets chief Global strategist.

Now Jay earlier this year back in January, you were here on the show and you liked Costco and you said say goodbye to Dollar Tree.

So here's the trade.

Since then, January was where we were.

Dollar Tree is down by 16%.

Cost goes up by 23%.

It turned out pretty well.

It did and Dollar Tree is now down 20% after earnings today.

So unfortunately, the slide continues for dollar tree.

It does.

And so you are sticking with the same situation here.

So let's run through it for people and let's take Costco first as your goodbye, the stock that you liked and you still like.

So let's let's get to the technicals first because I know that is your bread and butter is.

It is.

And when came on last time, we wanted to look at it from a longer term perspective because something big was happening, it was trending up uh as we see here.

And then it kind of stalled in this area when I came on last time in January as a technician, the first thing we look at is price and something that changes.

And we saw a major break out on a weekly pattern.

And to me this was, it's time to buy the stock, It's making the next leg higher.

So the technical basis was there, then you add in some of the fundamentals and it was one of those stocks was tough not to love.

So that is why we looked at it on the five year.

Now.

Uh I think you may have a one year next.

Here you go.

So now we we 50 day moving average and this is the 200 day moving exactly.

Now the stock has continued to trend higher.

After breaking out, it consolidated a little bit around the 50 day moving average and it took another leg higher.

Now, the stock is up 25% year to date.

Uh It may not run like we've seen here.

But when comparing the two stores, I think there's more juice to be squeezed in this trade.

And uh over the long term, I think this is a better name to be in.

Uh, it is slightly over bought in the RSI.

We'll talk about that when we say things, I don't like about the stock.

But, um, right now it, it remains best in brief.

Ok.

So let's get to some of your other points on the more fundamental side.

You say the earnings here pretty consistent, extremely consistent.

They've beaten, uh, nine of the last 10 times.

They've traded higher, only seven of the last 10, the last two times.

They actually traded lower.

You know why they traded lower because they didn't raise the prices on their membership.

That was the complaint they beat their guidance was solid, but they didn't raise prices on their membership.

Well, is that gonna continue to be a headwind because in this economic environment where people are feeling a little under pressure, are they gonna be able to raise prices?

And is that gonna continue to be a little bit of a headwind for the, they had the opportunity and the story to do so and they didn't, that's why their customer base is so loyal and that's why the brand is, is iconic in his own sense.

So that's what we keep seeing out of them.

So when that's the negative story, I'm pretty positive on the stuff you're not convinced and then some of the other fundamentals you're looking at, you talked about the membership that's part of it.

Um And then just that sales is consistent and they have a strong worker base, strong sales in the worker force.

There was a survey, I don't know where the survey came from, but it's the happiest worker for, for workforce at a big retail.

And when you see an industry where people complain a lot and they, they, they look for better opportunities.

The, the Costco worker is very happy to be there.

And that, you know, if you ever go in, it's such a great environment.

Uh And I think that just feeds to the, the Costco narrative.

So it, it hits on technical fronts, fundamental fronts and uh you know, it's a stock that you just want to hold on to, will it make that euphoric rise that we got to catch in January?

Maybe not, but I think it's something that's gonna continue to slowly rise over time.

A steady winner perhaps.

All right, let's get to what you mentioned, maybe potential downside here.

Yeah.

Well, last time I was here, I said, well, one of the headwinds pe ratio is historically high.

It was in the low forties at the time now.

It's at 50 that is relatively high versus an average of the thirties.

Uh I'm not much of a pe guy but uh it is getting a little frothy.

And then when you look at technically the run uh on its relative strength index, it is overbought.

Overbought does not mean it's not going, it's gonna turn, but it's gonna struggle to go much higher from these levels.

So I think the stock could stall, consolidate in this area, but it could probably be setting up for another leg higher in a few more months.

All right.

And then on the flip side, you got Dollar Tree here was underperformed.

You say the price action has been negative.

So let's get straight to your chart on this one.

Here's a weekly performance as well.

Yeah, this is five years and I like to look at it on two time frames.

The longer term, what we said and we talked about it last time it kept making a series of lower highs, not the greatest line in the world.

But um what we're seeing is the stock very toy and rolling over.

What did it do?

It just broke its 200 weekly moving average.

Uh It's not a line in the sand, but it's very negative.

And then when you look at the fundamental stories behind it, they've had some struggles.

Yeah.

But let's look at that.

I know you wanted to look at the one year chart as well.

So that's what we have here.

And I love that we have gaps in the chart.

Some people don't like the line charts with the gaps.

But these, I am picking on you.

I know.

And then there's another gap sadly under uh the ironically enough, uh what we've seen here is the stock gap down and failed to fill that gap.

And then it's what did it do?

It rallied to the 50 day moving average, which is declining, went down, it went back to the 50 down.

Uh This is what we call a nice downtrend.

And then when you look at the story behind it, you can see why it's in that downtrend.

You've got some work to do.

So let's get to that big retailers including Dollar Tree struggling here lowering prices.

I mentioned the sort of bigger environment.

Yeah.

Well, we saw Dollar General get hit last week.

Five below comes out after the belt today.

You see how they're doing b in down trends and then their biggest competition, Wal Mart and Target, they're lowering prices.

Now, that's even more competition for them because their margins are tight enough being that it's a discount store.

So those big retailers lowering prices, it's going to make it even tougher for them going forward.

And then there's the albatross that we talked about before.

Family dollar.

Now, Dollar Tree says they're thinking about getting rid of family dollar after they fought so hard to buy that company.

$8 billion in 2015 is what they spent to buy family dollar.

And, uh, they have over 8000 stores of family dollar, 16,000 in the general family.

So that's half of what's going on.

They have not been doing well.

Uh, shrink has played a major factor.

Shrink for those that don't know at home, uh, theft and damage in the stores, uh, that has been an issue they've been addressing again and again and again, they are finally consolidating.

And they said today, they're exploring their options going forward, as you said.

So that means they're exploring possibly a sale.

A, I don't know if that would work, but right now they're trying to, you know, curtail the damage that uh that brand has done to their overall brand of dollar tree.

What could go?

Right.

What could go?

Right.

Well, we, we could shrink the amount of stores.

We have a family dollar, we could consolidate there.

That's good.

Uh Their numbers weren't too bad.

So we're seeing progress made, but it's gonna take some time.

They're not just gonna snap their fingers overnight.

Um So improve those existing locations and then they're not expanding.

So, you know, that wave of expansion and we saw some of that, you know, during COVID when, you know, people uh especially at the low income retailers were getting, you know, an opportunity to go there and get a good deal.

I I it's just not there.

So maybe rates coming in that could help them.

But uh they've got to kind of curtail what they're doing now.

It looks like they're making progress in that.

But price action it's negative today wasn't that bad as far as earnings go and we still sold off watch near term 1, 12, longer term, 103 is support levels.

If not, we could be in a double digit number uh in the next three months and that could be bad all Right.

So, you're sticking with it.

Buy Costco.

Avoid Dollar Tree.

Do you have a position?

I don't, I wish I, I wish I listen to myself though.

Costco was a good one.

But, uh, no, I think there's, uh, more juice to be squeezed in these trades and it's good to revisit them, especially after earnings in dollar Tree.

I frequently wish I'd listened to myself, Jay Watts.

Thank you so much for being here.

Good to see you.