Madison Funds, an investment management firm, published its “Madison Investors Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 6.82% was recorded by the fund’s Class Y shares for the second quarter of 2021, compared to the S&P 500 Index gains of 8.55% for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Madison Funds, the fund mentioned Dollar Tree, Inc. (NASDAQ: DLTR) and discussed its stance on the firm. Dollar Tree, Inc. is a Chesapeake, Virginia-based discount store company with a $23.4 billion market capitalization. DLTR delivered a -6.53% return since the beginning of the year, while its 12-month returns are up by 2.09%. The stock closed at $101.43 per share on August 18, 2021.
Here is what Madison Funds has to say about Dollar Tree, Inc. in its Q2 2021 investor letter:
“Dollar Tree is a leader in the discount retail market, operating just under 16,000 stores, about evenly split between its two concepts Dollar Tree and Family Dollar. The Dollar Tree banner is the primary profit driver, accounting for >70% of the company’s earnings, and is a gem of a business. Operating as the only ‘true’ fixed-dollar-price-point retailer at scale, Dollar Tree has carved out a unique position within the retail landscape that has proven very difficult for others to replicate. The model’s consistent demand profile is equally impressive, with the business only reporting one negative year of same-store-sales growth over the past 25 years.
We see plenty of runway for store growth ahead, which positions the business well to consistently compound earnings and value at an appealing clip. As strong as the Dollar Tree model is, it is not without challenges. By definition, the fixed-price model doesn’t afford management the opportunity to increase prices to offset rising costs. The model is also disproportionately dependent on sourcing products from overseas manufacturers in order to keep costs down to be able to maintain the $1 price point and preserve a healthy margin.
Unfortunately, the current retail environment is marked by materially increasing freight costs (specifically import freight rates), increasing wages and concern for widespread inflation. Fortunately, we see these factors as largely transitory and manageable. One of Dollar Tree’s core competencies is creatively utilizing their massive vendor base to flex its buying to accommodate fluctuating costs. This includes altering pack sizes/quantities, sourcing from new vendors, shifting the mix of product in stores, etc. This deftness was on display when various tariffs were imposed by the Trump Administration that directly impacted Dollar Tree trade lanes, but ultimately resulted in minimal impact to margins. Further, management has a new arrow in its quiver this time around with their Dollar Tree Plus initiative. While still early, management is rolling out multi-price point items (mostly at $3 and $5 price points) that has the potential to provide a meaningful boost to sales and margins. Additionally, with much of the focus on Dollar Tree’s potential cost woes, we believe insufficient attention is being paid to the traction management is gaining at Family Dollar. After a few years struggling with digesting the acquisition, efforts made to change leadership, merchandizing, store design, and more now appear to be paying off with strong sales trends and achievement of the highest operating margin in years.
With the stock currently trading around 15x earnings achievable within the next year and at about the lowest Price/ Earnings (P/E) multiple relative to the S&P 500 it’s traded at in at least 20 years, we see great value in this out of favor stock.”
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Based on our calculations, Dollar Tree, Inc. (NASDAQ: DLTR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. DLTR was in 42 hedge fund portfolios at the end of the first half of 2021, compared to 41 funds in the previous quarter. Dollar Tree, Inc. (NASDAQ: DLTR) delivered a -6.85% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
