One of the most popular actions in TSX over the last year, and for good reason, it's dollarama (TSX:DOL). The stock's impressive performance and rapid price rise have caught investors' attention, especially as an uncertain market environment and severe economic headwinds affect many other stocks.
Seeing Dollarama stock excel while most other companies struggle isn't entirely surprising. After all, it is a discount retailer with more than 1,400 stores nationwide. And it is one of the most well-known brands among consumers, especially those looking to save money and buy essential products at discounted prices.
The stock has proven that it can be a reliable long-term investment, as it has grown consistently year after year, no matter how the economy has performed.
However, if you're considering investing in Dollarama stock today, here are three things you should know before you pull the trigger.
Dollarama's recent growth has been driven by economic conditions.
The first thing investors should know if they are considering buying Dollarama stock today is that much of the impressive recent performance is due to the impacts the economy is having on consumers.
Now, of course, Dollarama is a high-quality stock that has improved its merchandising in recent years and has increased customer loyalty, something it is taking advantage of today.
However, it's worth noting that Dollarama has seen above-normal growth in recent quarters as a result of both rising inflation and higher interest rates.
Therefore, while Dollarama should continue to grow its sales and profitability regardless of economic conditions, as the economy improves, the pace at which Dollarama has been growing its operations over the past few quarters will almost certainly slow.
Dollarama Stock Trades at a Growth Premium
It's also worth noting that Dollarama stock is trading at a significant growth premium. Investors know it's one of the best and most reliable defensive growth stocks on the TSX. Furthermore, it is widely known that Dollarama has the potential to rapidly and consistently increase shareholder value.
In fact, over the last decade, Dollarama has generated investors an astonishing 705% total return, or a compound annual growth rate of 23.2%. So naturally, as demand for such high-quality shares increases, Dollarama has started trading at a premium.
Currently, Dollarama shares are trading at a future price-earnings ratio of 28.7 times, slightly above its three-year average of 26.3 times. However, that's much higher than most of its retail competitors.
Highlighting this premium for Dollarama isn't meant to discourage you from investing in high-quality stocks, but if you're going to buy the discount retailer, it's essential to be aware of how expensive it is trading. It's also why you should only buy Dollarama stock if you plan to hold it for the long term.
Buy Dollarama shares only if you are investing for the long term
Like almost every other stock on the market, Dollarama has the potential to be very volatile and is very likely to lose considerable value in a short period of time.
Even DOL did nothing to deserve a hit to its stock price; Sometimes a macroeconomic development or simply the expectation that Dollarama may face headwinds in the future can cause shares to fall.
So considering the growth premium you have to pay for Dollarama, it's essential to buy the stock for the long term. After all, the only reason it is such an attractive stock and in high demand among investors is because of its constant, long-term growth potential.
Long-term investing mitigates short-term risk. So no matter how Dollarama performs over the next year or two, as long as it can consistently expand its operations and grow revenue over several years or even decades, its capital should grow quickly in tandem.
And considering that Dollarama plans to open between 60 and 70 stores over at least the next five years, plus its Latin American investment, Dollarcity, is growing rapidly, there's no doubt that if you plan to hold Dollarama stock for the long term, then it's a of the best investments you can make today.
