Don't Fall for This Stock

There's a point where investors should look at a stock's performance and ask, "What's the justification?" Department-store stock Dillard's (NYSE: DDS  ) is a perfect example.

At my last check, Dillard's shares have surged more than 6% in just today's trading. Granted, Dillard's did report healthy June same-store sales growth of 6%, beating analysts' estimates of a 3.3% increase.

However, June looks like it was a pretty good month for retailers overall. Department store rival Macy's (NYSE: M  ) also reported healthy same-store sales growth of 6.7%. Kohl's (NYSE: KSS  ) reported a whopping 7.5% increase in comps.

Dillard's doesn't exactly deserve investors' unbridled euphoria, though, even if it did knock June comps out of the ballpark. The stock has surged about 160% in the last year. Although Dillard's has managed to increase its earnings per share by 115.9% in the last 12 months, its total revenue growth has been either decreasing or anemic for years running. Sales growth of 1.1% in the last 12 months is nothing to write home about.

Investors are paying way too much for Dillard's right now. It's trading at about 16 times trailing earnings. Compare that with Target (NYSE: TGT  ) , Kohl's, and Macy's, which sport price-to-earnings ratios of 12, 14, and 13, respectively. Need another metric that shows Dillard's is way overvalued? Its PEG ratio is 2.91. Investors are kidding themselves if they think this retailer can drum up the kind of growth to justify the stock's current multiples.

Occasionally, a retailer is just so darn good at what it does that it deserves premium prices. Look at Costco (Nasdaq: COST  ) , and check out what Charlie Munger had to say about this retailer. Unfortunately, that's not the case with Dillard's. 

I believe Dillard's shares are shockingly overpriced, and that investors buying in now are taking a terrible chance. If you disagree, tell me why in the comments box below, or add additional thoughts on this stock's long-term prognosis. Or just add it to your Fool watchlist to see what happens next.