Dollar General remains attractive but be defensive on the stock

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Inflation is still running hot, and consumer budgets are getting squeezed further. Discount chains like Dollar General Corporation (NYSE:DG) have benefited immensely this year. The stock is bound to benefit more as the economy is yet to get out of the woods. 

Dollar General trades at $255, close to the highest ever level of $262. There is no doubt that the stock could hit and potentially surpass the previous top. Ahead of the earnings on August 25, analysts are too optimistic. Zacks Investment Research analysts expect an EPS of $2.91, higher than the $2.69 reported last year. 

On valuation, Dollar General has a PEG ratio of 2.05. Despite being lower than the sector’s PEG ratio of 2.10, it indicates a high premium for the discount retailer. The valuation still does not scare away analysts.

Oppenheimer said in a note that Dollar General is well positioned for long-term performance. The analysts cite the defensive attributes of the stock and strengthening fundamentals. Oppenheimer expects more than 10% EPS growth and a 2%-4% increase in comparable sales. The analysts have a $275 price target for the stock.

Dollar General nears the tail-end of the bullish trendline

Source – TradingView

Technical indicators show that Dollar General could make more strides. An RSI reading of 62 suggests that the stock is yet to enter the overbought zone. However, with the price near the $262 potential resistance zone, a correction is likely. The stock’s valuation could also scare investors and force a sell-off. We recommend buying on a retracement or after a breakout that could be triggered by the quarter results.

Summary

Dollar General is bullish, but a correction could occur around $262. We do not encourage buying at the high valuation. Wait for a breakout or retracement.

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