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Why Dollar General Corp. Is Poised to Pull Back

By Brian D. Pacampara, CFA – Feb 19, 2014 at 9:48AM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Dollar General Corp. (DG 3.22%) slipped about 1% this morning after Wells Fargo downgraded the discount retailer from outperform to market perform.

So what: Along with the downgrade, analyst Matt Nemer lowered his valuation range to $55-$58 (from $59-$63), representing as much as 5% worth of downside to yesterday's close. While contrarians might be attracted to Dollar General's share-price weakness in recent months, Nemer thinks that the upside remains limited, given his view of a weakening environment for the low-end consumer.

Now what: According to Wells, Dollar General's risk/reward trade-off is relatively unattractive at this point. "[T]he environment for the low-end consumer continues to deteriorate causing discretionary weakness that is impacting both sales and gross margin, and we see increasing likelihood FDO could pursue strategic alternatives that we view as a shorter-term negative for DG," noted Nemer. When you couple those headwinds with Dollar General's near-20 P/E, it's tough to disagree with Wells' cautious stance. 

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Dollar General Stock Quote
Dollar General
DG
$243.96 (3.22%) $7.62

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