Stephen Mandel Is Clearing Out The Local Dollar Tree

Dollar Tree was one of two dollar stores to make our list of the most popular retail stores among hedge funds for the third quarter (see the full rankings). The other was Dollar General, which actually won the #1 slot. Dollar General, which as we’ve noted was another Mandel pick, trades very similarly to Dollar Tree: its trailing P/E is just a bit higher at 17, and both companies are valued at 14 times forward earnings estimates. Dollar General also recorded close to 50% earnings growth in its most recent quarter versus a year earlier. It’s tough to pick between these two stocks given how similar they are.

Of course, there’s another self-proclaimed dollar store- Family Dollar Stores, Inc. (NYSE:FDO)– and hedge fund favorites Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) are sources of competition as well. Family Dollar doesn’t seem like as good a deal as the companies we’ve previously discussed: its growth rates are lower and its trailing P/E is higher, at 20. Wal-Mart and Target are a slightly different class of retailer. They are, of course, considerably larger in terms of market cap; they are more closely tied to the economy, with betas in the 0.4-0.5 range; partly as a result of their larger size, their growth rates are lower but still quite respectable. With trailing P/E multiples in the 14-15 range (Target has a small discount) it’s possible that the dollar stores’ superior growth rates makes them better buys at their small premium to these more established retailers.

We can see why Lone Pine likes Dollar Tree. While there really isn’t much to distinguish it from Dollar General, these two companies are growing nicely and don’t look that expensive relative to the big boxes- and they’re certainly much better values than Amazon.com, Inc. (NASDAQ:AMZN). We’d be interested in examining those two dollar stores more closely.