Dollar Tree, Inc. (DLTR), Family Dollar Stores, Inc. (FDO): Both Value Shoppers And Value Investors Have Better Alternatives

Dollar Tree, Inc. (NASDAQ:DLTR) runs more than 4,000 states across 48 states in the U.S., and entered the Canadian dollar store market in 2010 with the acquisition of Dollar Giant in November 2010. Unlike Dollarama, which employs a multi-price point strategy ranging from C$0.69 to C$3.00, Dollar Tree focuses on a single price point for its merchandise: C$1.25 in Canada and US$1.00 in the U.S. Since the re-branding of Dollar Giant’s existing 86 stores as Dollar Tree stores, it has grown its store count in Canada to 140. As mentioned above, Dollar Tree will give Dollarama a serious run for its money if it executes on its ultimate store count target of 1,000 stores.

Dollarama and Family Dollar Stores, Inc. (NYSE:FDO) trade at similar PEG ratios of 1.3, while Dollar Tree, Inc. (NASDAQ:DLTR) is valued by the market at a more attractive 1.0 times PEG. Dollar Tree is not only undervalued relative to its peers, but it also delivered the highest ROA of 22.7% in the peer group. In contrast, Dollarama and Family achieved similar ROAs of 13%-14%.

Conclusion

It is easy to be tempted to invest in the stocks you know (and shop at). However, valuation, and not familiarity, should be the key consideration in selecting a stock for your investment portfolio. Dollarama is overvalued at 1.3 times PEG and 18 times forward P/E.

The article Both Value Shoppers And Value Investors Have Better Alternatives originally appeared on Fool.com and is written by Mark Lin.

Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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