In this article, we will look at the 7 Cheap Reliable Stocks to Invest in. Let’s look at where Dollar General Corporation (DG) stands against other cheap reliable stocks.
Overview of the American Retail Segment
Retail sales in the United States rose unexpectedly in August. According to a report by the Commerce Department, retail sales rose considerably faster than analysts’ estimates from July. They increased 2.1% year-over-year in August, with online sales rising 1.4% after falling 0.4% in July. In addition, gasoline station sales fell by 1.2%, reflecting lower pump prices. When combined with a decreased unemployment rate, this retail landscape caused the Federal Reserve to issue a half-percentage-point interest rate cut.
While auto dealerships experienced a decline in receipts, strength in online purchases balanced the level, suggesting a solid footing for the economy through the most part of Q3 2024. After the data, the Atlanta Fed raised the Q3 2024 GDP growth estimate from 2.5% to 3.0% annualized rate estimate. The economy grew at 3.0% in Q2.
Holiday Outlook For US Retailers
Sales in the holiday season typically account for more than half of the annual revenue of US retailers. According to estimates by the Boston Consulting Group, US retailers will likely see a “measured” holiday cheer in the upcoming holiday season. Although signs like cooling inflation point to strong consumer spending, several other factors are likely to take a toll on overall spending.
According to a Challenger, Gray & Christmas report, US retailers are likely to hire fewer holiday workers this holiday season compared to 2023. A softer labor market and uncertain consumer spending trends are the primary drivers behind this trend. In addition, a Deloitte forecast revealed that US holiday sales will likely grow at their slowest rate in six years. Depleting savings is making shoppers more conscious this holiday season.
The 2024 Holiday Outlook Survey by Boston Consulting Group shows that while 28% of consumers plan to increase their spending compared to 2023, 27% plan to decrease it. 45% plan to spend the same amount. There are reasons behind these split trends. Real consumption has continued to increase post-pandemic, with household incomes and balance sheets getting strong in American households. In spite of these positive growth indicators, global military conflicts, ongoing geopolitical tensions, and the upcoming 2024 presidential elections are painting an environment of split attention for consumers.
Despite its recent cooling, inflation has resulted in high consumer staple prices, restricting budgets for holiday shoppers. These trends are also leading to increased inclination towards deal-seeking and intentional channel selection.
Our Methodology
We first consulted stock screeners from Finviz and Yahoo Finance, along with online rankings, to create an initial list of 15 publicly traded retail companies with a forward P/E ratios of less than 23 (the broader market is trading at a forward P/E of 23, as per data from WSJ). From this list, we selected the 7 stocks with the highest number of hedge funds holders as of Q2 2024, and used that as our ranking metric.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Cheap Reliable Stocks to Invest In
Dollar General Corporation (NYSE:DG)
Forward P/E: 14.41
Analysts’ Upside Potential: 12.15%
Number of Hedge Fund Holders: 42
Dollar General (NYSE:DG) operates a chain of over 20,000 discount retail stores across the US and Mexico. Its stores offer discounted deals and reduced prices on various offerings, including clothing, grocery items, kitchenware, pharmaceuticals, outdoor furniture, health supplies, and more. Its discounted rates and a large number of stores give it a competitive advantage, especially since it is focusing on a fast rural expansion of its chain. Dollar General (NYSE:DG) is planning to open more than 800 stores across the US and remodel approximately 1,500 locations while relocating 85 stores in 2024.
The company is also prioritizing a timely and accurate supply chain, customer-centric merchandising, and in-store execution to boost its profitability. It is centering efforts around strengthening its connection with its customer base by ensuring that they have a positive experience. To do so, Dollar General has increased employee presence at the front of their stores for increased engagement that facilitates a positive checkout experience. It is focusing labor hours on perpetual inventory management to boost its in-stock levels and facilitate sales growth.
The company’s merchandising and supply chain teams are also putting in efforts to expedite in-store progress, helping simplify operations for its teams. All these efforts are showing significant year-over-year improvements in the company’s in-stock levels, strengthening its position in the industry.
In addition, Dollar General Corp (NYSE:DG) is one of the companies in a good position to benefit from the US Federal Reserve’s September interest rate cuts. The cuts are anticipated to increase liquidity in the market, which can drive sales by benefiting customers.
Artisan Value Fund stated the following regarding Dollar General Corporation (NYSE:DG) in its fourth quarter 2023 investor letter:
“Our biggest full-year detractors included energy holdings Schlumberger and EOG and 2023 purchases Baxter International and Dollar General Corporation (NYSE:DG). Dollar General, a discount retail chain in the US, has dealt with a few struggles. The retailer had previously benefited from COVID stimulus checks, reflected in the bump it experienced in revenues and margins.
However, the effects have worn off, and its core consumer has been hurt by inflation, stiffer economic conditions, lower tax refunds and reduced SNAP benefits. Margins are also under pressure due to labor costs, shrink and markdowns. Some of the issues are likely self-inflicted. After years of focusing on store growth to drive the top line, store standards have suffered. Addressing store standards is needed to turn around flagging traffic, comps and customer satisfaction. On the positive side, discount retail due to its trade-down feature tends to be a defensive business during economic slowdowns.
Dollar General has a strong market position and faces less competition than other discounters due to its largely rural footprint. The business’s value proposition is everyday low prices, a convenient format, and proximity. The company has leverage due to capital expenditures, but interest coverage of ~9X is strong. From a valuation perspective, the froth from the pandemic, when it traded in the low- to mid-twenties, is gone. So, we aren’t paying for margin upside or store growth. Those would be bonuses. If the company can continue to grow revenues, generate cash flow, and buy back stock, we still see a path to success.”
Overall, DG ranks 5th among the cheap reliable stocks to invest in. While we acknowledge the potential of DG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.