When covering unusual stock options volume, the headlines usually center on enterprises that enjoy increased trading activity. Not much attention relatively speaking is paid to companies whose shares encounter reduced volume in the derivatives market, such as the case for discount retailer Dollar Tree (TREE). Still, despite the apparent snub, investors should pay close attention to DLTR stock. It’s an economic barometer, as the data clearly demonstrates.
Without getting into the granularity of specific valuation metrics, the overall fundamental picture for DLTR stock is incredibly compelling. Even before the COVID-19 pandemic, Dollar Tree provided customers suffering from various economic and financial challenges an avenue to pick up essential goods for cheap. However, with macro headwinds blowing stronger these days, the discount retailer stands poised to rise in relevance.
Mainly, the jump in mass layoffs represents a cynical godsend to DLTR stock. During holistic bull market cycles where most industries benefit, few gainfully employed people will shop at dollar stores. Instead, when they do their shopping, they may pick premium fare. In some cases, the truly well off may skip grocery shopping altogether, instead dining out or ordering in.
However, the recent headcount reductions effectively signal demand erosion in key sectors. Basically, high-powered industries no longer command the bravado they once freely disseminated. Therefore, it’s very possible – arguably probable – that more layoffs will erupt. This will almost invariably benefit DLTR stock.
Moreover, layoffs represent a total elimination of income (setting aside certain details such as severance packages and unemployment insurance). Once saved funds start drying up, a zero-cash-flow dynamic immediately forces the unemployed into survival mode. Again, it’s a cynical framework but such desperation eventually benefits DLTR stock.
Yet options traders apparently don’t view these circumstances as a market opportunity. That might be a mistake because Dollar Tree represents an economic barometer.
DLTR Stock Suffers an Unusual Erosion of Activity
Following the closing bell of the Feb. 10 session, DLTR stock stood among the ranks of Barchart’s screener for unusual stock options volume. However, in this case, DLTR raised eyebrows not because volume increased but rather decreased.
Specifically, total volume slipped to 3,939 contracts against an open interest reading of 150,170. Against the one-month average volume level, the Friday session represented a decline of 43.39%. Diving deeper, call volume hit 2,538 contracts while put volume pinged at 1,401. Admittedly, in most other circumstances, these stats would leave affected stocks unnoticed.
To be fair, other details associated with DLTR stock make it a seemingly uninteresting – perhaps a risky – investment. Right now, the Barchart Technical Opinion rating grades Dollar Tree shares as a 40% sell. It notes that DLTR features a weakening short-term outlook on maintaining its current trajectory.
On the flipside, the consensus analyst sentiment views DLTR stock as a “moderate buy.” Presently, the breakdown of opinion among Wall Street experts stands as nine strong buys, seven holds and one moderate sell. While broadly bullish, the individual assessments demonstrate much room for disagreement.
Still, the main point that investors should focus on is the revenue growth profile. Between Dollar Tree’s fiscal fourth quarter of 2019 through Q3 2020 – coinciding with the worst of the COVID-19 pandemic – the average quarterly year-over-year revenue growth stood at 6.71%.
As COVID fears faded in the following one-year comparison (Q4 2020 to Q3 2021), the average quarterly YOY sales growth sat at 3.79%. Notably, the period between Q4 2018 to Q3 2019 saw average sales growth of 2.45%. The message is clear – when circumstances are normal, Dollar Tree’s growth decelerates.
However, in the past four recorded quarters, YOY sales growth now averages at 6.5%. In other words, the nature of the economy is changing. Desperation is rising, which means that cynically DLTR stock may become a very relevant investment idea.
Risky But Compelling
In fairness, acquiring DLTR stock right now presents serious risks. Currently, the market prices DLTR at a trailing multiple of 20.48. As a discount to earnings, Dollar Tree ranks worse than 62.5% of its rivals. Also, DLTR trades at 19.72-times forward earnings. As a value proposition, the company ranks worse than 69.49% of the industry.
Therefore, on paper, Dollar Tree doesn’t immediately compel investors to buy in. However, the market may be ignoring the role of the company as an economic barometer. Moreover, as circumstances worsen – which would seem to be the case – demand for discount retailers may rise as consumer desperation increases.
Ultimately, then, Dollar Tree deserves greater attention, not less. For the portion of your portfolio earmarked for speculation, DLTR stock makes a lot of sense.
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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
