With earnings pickings getting slimmer and slimmer each week, we're forced to
dig deeper – deep discount, that is – to find our next trade. Dollar General
(NYSE: DG ) is the stock, and earnings are due next Tuesday before the market
open. The discount retail trade is back once again, as the economy's recovery
appears to have taken a break. With stubborn unemployment and flagging consumer
sentiment, shoppers are once again opting for low-priced alternatives. Recent
earnings successes from Wal-Mart (NYSE: WMT ) and Dollar Tree (NASDAQ: DLTR )
underscore this theme. Analysts expect DG to come in with earnings of 48 cents a
share, a 14% increase from a year ago. However, this is considerably less than
the average 37% increase the company has logged for the past four quarters. With
five earnings beats in the past six quarters, the prospects for DG to come in
higher than 48 cents are favorable. DG has been on a nice bull run along its
10-day moving average after bouncing off the $30 level. In fact, the shares are
up 10% off their Aug. 8 low, a move that has pushed them above the 50-day moving
average. But there's still more than 6% of upside room before the stock hits
its 2011 high just above $35. Sentiment toward DG is mixed. A robust
short-interest ratio could lead to some short-covering activity. Analysts are
generally bullish, with two-thirds rating the stock a buy. Thus, sentiment is
not a main factor in this trade. With the market flailing around, DG has been a
major outperformer against the S&P 500 for most of August. With technical
support in place and deep-discounters having a solid earnings season, look for
DG to exceed rather modest earnings expectations next week. Buy the Sept. 30
call for around $3.50. Have a great trading week.
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