In this piece, we will take a look at the top 5 stock picks of Michael O’ Keefe’s 12th Street Asset Management. If you want to learn about Mr. O’ Keefe, his firm’s background, and more stocks in his portfolio, then head on over to 15 Stock Picks of Michael O Keefe’s 12th Street Asset Management.
5. Dollar General Corporation (NYSE:DG)
12th Street Asset Management’s Stake Value: $32.6 million
Percentage of 12th Street Asset Management’s 13F Portfolio: 7.21%
Number of hedge fund holdings: 46
Dollar General Corporation (NYSE:DG) is an American retailer renowned for its discounted merchandise which covers hundreds of different products. The company was founded in 1939 and is headquartered in Tennessee.
Mr. O’Keefe’s 12th Street holds 154,057 Dollar General Corporation (NYSE:DG) shares as of the third quarter of 2021. These are worth $32.6 million and represent 7.2% of the firm’s portfolio. Out of the 867 hedge funds surveyed by Insider Monkey at Q3 2021 end, 46 held a stake in the company.
Dollar General Corporation (NYSE:DG) reported $8.6 billion in revenue and $2.69 in GAAP EPS for its second quarter, beating analyst estimates on both counts. In an October 2021 analyst note, B. Riley lowered the company’s price target to $56, outlining that the retailer stands to positively benefit from its partnership with an activist investor.
In its Q1 2021 investor letter, Polen Capital mentioned Dollar General Corporation (NYSE:DG). It outlined that:
“We have eliminated Dollar General to fund the purchase of Amazon, which we consider a superior investment opportunity. We feel Dollar General has been an excellent “Safety” holding for us, especially in 2020. Since our initial purchase in July 2016, Dollar General shares have more than doubled, beating the S&P 500 and slightly underperforming the Index (our actual returns were higher, as we had added to the position on a drawdown soon after our initial purchase).
During the COVID drawdown in early 2020, Dollar General declined 10% versus 25% for the Index and 29% for the S&P 500. We had expected the company to grow its store footage 5% per year with same-store sales increasing 2-3% and yielding revenue growth of 7-8% over the long term. Slight margin expansion would lead to 10%+ EPS growth, according to our research.
2020 could have pulled forward more than three years of revenue and earnings growth into a single year. The pandemic and quarantining led people to stock up on everyday consumables, and stimulus checks and extended and elevated unemployment benefits have allowed Dollar General customers to spend more. In fact, the company recently reported full-year 2020 results in which revenue grew 22% and EPS grew 60%. These results included over 200 basis points of margin expansion off a low base of 8.3% operating margins in 2019. This compares to margin expansion of tens of basis points in typical market environments. Dollar General now has over 17,000 stores. There could be more than three years of approximately 5% annual square-footage growth left before maturing at over 20,000 stores. Same-store sales growth could be in the 3-4% range for some time, and we think the company remains extremely well run. We simply believe our investment in Amazon is a superior alternative.”
