Dollar General Stock -- the end for DG, or a once in a decade buy opportunity? I think the latter.

you smell that what is that what what's that smell a cologne [Music] no [Music] opportunity hi everybody so Dollar General today lost about 33% of its market value and closed at a little over $84 a share what may have been painful for existing sh share holders is actually a gift for somebody who's been considering an allocation to the stock so friends today Dollar General is trading at a psse level of minus 1.5 and friends the last time the stock traded at these levels which was back in 2016 2017 it earned a subsequent three-year annualized return between 30 to 45% perom in terms of a multiple that's about a 2 to 3x return over 3 years and friends the reason for this in my view is that the markets typically price in overly uh pessimistic expectations on the stock and when investors realize that things aren't as bad as feared and expectations improve the stock will be repriced upwards so friends in my view the Stock's risk reward today is skewed to the upside for the next few years and friends if you want to know why please keep watching hi everybody welcome back to the channel collective intelligence where we try to offer a non-nonsense datadriven approach to evaluating investment opportunities I'll share with you my investment approach and analyses that I've developed over the years and share with you what I'm seeing with the data and Hope hopefully you can use these insights in your own due diligence process so friends that said today's video is on Dollar General ticker DG one of the most recognized names in the discount retail category today the stock trading at a little over $84 and being down almost 33% today I'll make the case that the stock price today at these levels offer above average risk adjusted opportunities over the next few years and friends as always the point of this Channel and video is not to go into a deep dive on the background of the stock or to recap past events for Dollar General there's plenty of resources out there if you want more detail I know our time is important so I want to provide you with the highest return on invest time so for those of you who'd like a in-depth recap on Dollar General there are a number of online resources out there that you can tap into things like Seeking Alpha tip rank CNBC Bloomberg and many many other YouTube channels as well my objective with this channel is to provide you with a succinct recap of the results of my analysis of Dollar General and where I think the stock might go from here again I'm hoping that it can complement and be additive to your own due diligence process so friends that said here is a 30-second update to get you back up to speed so friends many of us might not be aware but Dollar General is almost a 90-year-old company and is one of the most established names in the discount retail category with over 20,000 locations in the United States back in 2016 the stock was trading at roughly $60 a share and nearly 5x to hit an all-time high of $250 in October of 2022 only to have all of those gains evaporate in Just 2 years issues of negative spending Trends competition and slower margin recovery all contributed to a nearly 70% Peak to trough decline in the stock where Dollar General Shares are currently trading in the mid 80s friends the last time it traded at these levels was back in 2017 and so friends there are a number of different reasons why the stock has fallen I just um highlighted a few of those but in my view the dramatic decline is more about the move away from the extremely high levels of optimism that was embedded in the stock price from a few years ago and this decline helped to wash out the excesses that were implied in the stock price and more on that a little bit later as I talk about my psse model and the results therein and friends as usual before we jump in just a reminder and disclaimer that this video and the rec contents they in are my opinions only and is not investment advice all investors are different and have unique needs and Circ cumstances so please do your own research and due diligence and seek advice from an independent licensed professional that knows your unique situation and can recommend Investments that suit your specific risk tolerance and so friends with that said let's go ahead and Dive Right In all right everybody so to summarize for those of you who want just a very quick synopsis and those of you who want a little bit more detail just feel free to keep watching at a stock price around $87 the markets in my view already pricing in some largely pessimistic expectations for Dollar General uh again based on my psse model the risk reward at these levels in my view it's really skewed towards the upside over the next few years since the Stock's second IPO in 2009 when Dollar General uh traded at these levels which was a negative 1.5 psse subsequent threeyear analyze returns were anywhere between 30 to 45% perom and lastly friends this is a very important point but don't expect the stock to move in a straight line from these valuation levels there will be choppiness in the stock because of short-term noise but investors with patience and a mult year year time Horizon uh should be rewarded with above average returns over the next 3 years especially if conditions normalize which is my expectation all right everybody so here are the model results for Dollar General friends at every point on this green line what it does it tells me the level of optimism and pessimism in the market for the stock and so what this means is that at any point in time I have a pretty good sense of what the temperature is of the market and what level of pessimism and optimism is being priced into the stock and friends as before by Design the model has a base value of zero which means that it is an average or neutral level of optimism and pessimism and from there I typically break out the signal into different segments of pessimism and optimism and so this first segment here is what I consider normal conditions pessimism and optimism uh optimism levels are at normal conditions and there's nothing out of the ordinary another way to think about this is that expectations are relatively unbiased biest and not skewed in any single Direction and friends as you start to move further out you start to get into territory where things become a little bit more abnormal and levels of optimism and pessimism become a little bit more elevated and so what we have here is in the Shaded red areas are elevated levels of optimism which suggests that the markets are applying overly optimistic assumptions to the stock and therefore you can think of this stock or stocks when it's treading in these areas as being overvalued and Friends generally as a rule of thumb when stocks are trading in these areas I generally avoid these stocks allog together or at best underweight them in my portfolio generally speaking I usually do avoid stocks at these levels just because the amount of optimism that's being priced into the stock to me it will end up resulting in much lower expected returns going forward and friends in fact in the very red area up top I just avoid things all together I don't even want to consider it just because my view is that I can find things with better opportunities elsewhere in the marketplace and so why you know stay focused and why stay married to this particular stock when I can find other interesting opportunities out in the marketplace and on the flip side markets can also have elevated levels of pessimism which is in the green shaded areas here and friends what you can think of this as the stock being undervalued at these levels just because of the level of pessimism that's being priced into the asset and as a general rule of them here I typically have an overweight position to the stock when the stock is trading at these levels and so friends I do want to emphasize one particular thing about this slide uh which is in the normal area here and this is something I didn't talk about in my last couple of videos I'm not suggesting that if things are trading at normal levels that you should ignore the investment all together on the contrary um when stocks and assets trading at normal conditions they have historically produced fantastic returns over time in fact I have invested many times in this normal or neutral kind of waiting area here and what I'll typically do is I'll typically scale the investment size accordingly and so friends there is a saying in the investment world that your position size should be a function of your level of conviction and so when stocks are trading in these normal areas my level of conviction is not you know very high and so typically I will have a neutral weight to that position and add and I'll particularly add a little bit more to the stock if the stock Falls significantly further but as an investor and this is kind of the key message of this slide here friends is that as an investor what I try to actively avoid is this area here which is the areas of overvaluation the red areas this is where assets are pricing in too much optimism and in most cases this is what I've seen over the years in most cases it's usually followed by a healthy dose of reality where optimism has difficulty materializing and friends this is why probability of downside increases so much when you invest at these particular levels here and so friends to summarize the model provides relatively good guidance on whether an asset is pricing in overly optimistic or pessimistic assumptions and so here's the psse model in green overlaid with the stock price graph in blue and so friends when it's overlaid in this way you can get a sense of the level again of optimism and pessimism in the marketplace at any point in time and at every level of stock price so friends instead of seeing things in just stock price we can actually now see things in terms of how much optimism and pessimism is being priced in to those asset prices and so this is just really for illustr purposes um the real power of the model in my view is on the next slide which is to see how the stock price eventually performs based on these psse levels all right and as usual friends this is it this is where the rubber meets the road this chart is the most important Visual and the best way to judge the strength of the signal that comes from the model and so what we're looking at here is the historical relationship between the model signal level which is on the x axis and how the stock did in the subsequent three years the stocks four threeyear returns which is on the Y AIS and so friends what we're trying to do here is we're trying to see if there's any sort of relationship here and one of the things that we see at the outset is that there appears to be a pretty strong relationship between the model and future returns in other words the collective signals are actually quite strong in explaining future returns of the stock now there is of course a little bit of noise and I mentioned this in my previous uh videos and that typically comes with any model as no model is perfect so you're always going to get these little bits of noise uh that surrounds the signal which is in the red line and so friends for example when we look at when model levels are at zero and remember that means that things are pretty normal and nothing is out of the ordinary there investors earned a future three-year return ranging anywhere from about 8 to 30% per anom and when we look at model levels at say let's more extreme levels let's say at uh positive two and this is again where markets are a little bit more optimistic and assets are a little bit more expensive investors generally lost money in the next 3 years when things were expensive and they lost money in the range of anywhere from minus5 to 22% and again this is the important point to consider when things are expensive you should expect to earn lower rates of return and then finally when we look at things at the Other Extreme which is in this case a negative2 markets are very pessimistic and assets are being priced very cheaply and investors generally earn above average returns now in this particular case what's interesting about Dollar General is that the stock never reached levels of -2 so we can't really say how the stock would have done at a level of2 now based on this trajectory and uh this graph and kind of where things are we might have a sense of where it might have um perform but again looking back historically um the stock has never reached those levels of -2 but if we look at in if we look at things in sort of the broader region or the broader range of minus1 to - 2 what we see is that returns have ranged in the low teens to about 45% so friends where we are today where we are today the stock is currently trading at a level of 1.5 negative 1.5 and so now the question is where will returns be over the next 3 years and I always have to emphasize this nobody knows nobody knows for certain but we'll only know after 3 years have passed but if history is any guide and this level of pessimism if it's anything like what it was in the past this means that there are really good odds of rewarding shareholders with above average returns over the next 3 years and Friends similar to what I've done in previous videos I put the model into another perspective here where I break the model levels out into desiles think of it as 10% chunks from the lowest 10% to the highest 10% to see what the average returns would be in each model desile and what we see is generally a downward sloping curve and friends what this tells me is that this is further evidence of the robustness of the model as it's consistent with my thesis that lower Des values which are the cheaper psse levels which is when the stock is cheap should produce higher rates of returns than stocks trading in the higher Des levels or the expensive psse levels which should produce lower rates of returns which again is what we've see historically and so friends Dollar General today is trading at the very first desile the bottom 10% and again if we were to look historically the average return the average threeyear annualized returns for Dollar General when it was trading in that desile was on average 36.5% and so friends before I wrap up I do want to make something very clear and this is a very very important Point as an investor you should always brace yourself for short-term volatility when you make an investment and you could have bought something that is very cheap or very expensive returns will almost never be in a straight line up and whenever it's not in a straight line up that means that there's always going to be some noise on the way up and so friends the way I want you to think about things is that the psse model you can think of the psse model as a signal and like most signals there's always going to to be some noise and some static around that signal and it's the noise and the static that is really not important you can almost think of it as a distraction sometimes it's going to distract you from the from from the real signal and what's important to realize friends is that the signal becomes clear over time and so friends what I want to illustrate uh for you is the following so on this slide what I show are the psse levels which is on the x-axis and this is ranging anywhere from minus 2 which again is you know the stock is cheap all the way to three which is where the stock is really expensive and what I want to see is how have the how what kind of returns did the stock produce 5 days after each level of the psse model and so what you can see here is that it doesn't matter what psse valuation levels are at you could have bought when things are very cheap or you could have bought when things are very expensive or you could have bought when things are trading at normal rates ranges over the short term noise dominates and the signal is lost and what I mean by that is again you could have bought very cheap or expensive whether you bought cheap or expensive you could have lost 20 to 30% in the next 5 days or you could have gained 20 to 30% in the next 5 days friends again this is why short-term time frames at least in my view it's just very very noisy and sometimes the signal gets lost in all of that noise if I were to take this one step further and if I were to look at five 20 days rather instead of 5 days it's a similar story it doesn't matter whether you invested at cheap psse levels or expensive psse levels or anything in between you could have easily lost 30% or gained 30% at all levels of psse so again the signal here is getting lost in all of the short-term noise I take this out one step further 50 days things are still noisy if I take this out one step further into 125 days you can think of 125 days as being about 6 months it is still relatively noisy which means no matter what levels of psse that you're buying an asset at you could either lose a lot of money or you can gain a lot of money okay so the signal itself is pretty weak now once you start getting out into a year okay that's where the signal starts to emerge just a little bit more in this case and not to get into too much kind of quantitative geek talk here but the R square here um is a little bit higher than what it was in the prior uh slides in the prior slides the R square was pretty much zero now the R square is just under uh under five and you can think of the R square as the explanatory power of the model and so in this case the explanatory power is getting just marginally a little bit better go out to 2 years though wow things start to become a little bit more interesting here and when you go out 2 years the R square jumps now to about 40 % so in other words the R square is getting higher and the explanatory power therefore is getting higher and what we see now is a relationship that's a little bit more clear meaning if you were to buy at cheap psse levels your expected return should be a lot higher over the course of 2 years than if you were to buy at expensive psse levels so again said differently the signal is emerging from all the noise and if you were to go to what we've seen before which is 3 years in 3 years that's where the signal is very strong in this case the signal is about 81% are are square so that means that the explanatory is very explanatory power rather is very high and so the results of the model and the signal of the model becomes more clear and much more apparent all right friends so just to summarize once again so Dollar General it's currently trading at the bottom Desa of my psse model uh the stock price is currently at $87 and markets are again and pricing in some very pessimistic assumptions or expectations into the stock price so current conditions in my view is suggest that investors are likely to earn above average returns over the next few years and as always friends returns in the short term it's always going to be volatile as I just shared in my previous few slides you can easily earn plus 30% or lose 30% in the next several days several weeks several months but over the longterm that short-term noise should cancel out and the true signal of the model model should emerge over time and as always friends if you will have a huge Advantage if you can think in terms of three to 5year Horizons I always encourage investors to think in longterm time frames as again you can use that uh to leverage to your benefit all right friends so that is all I have again sorry for the longer video I wanted to keep this video um you know relatively short and sweet but also at the same time I wanted to make sure to include those slides about short-term noise so again thanks again everybody for watching if you like the content and found it helpful again please hit the like And subscribe button so you can get more notifications on any new content I upload my plan is to again do maybe one or two stocks a week and so you'll get notified as they come out thanks again for watching and wishing you all investment success I'll see you next time