1 Growth Stock Down 70% to Buy Right Now

Dollar General (NYSE: DG) has experienced a brutal stock price decline, with its shares falling roughly 71% since hitting a peak in late 2022. It is facing headwinds, for sure, but the company is still growing. And its efforts to turn performance around appear to be gaining traction. Is Wall Street being too pessimistic today after, perhaps, having become too enthusiastic a couple of years ago?

Here's why now could be a good time to take a risk on Dollar General's stock.

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What does Dollar General do?

Dollar General is a retailer, but it has a unique position in the sector. For starters, it offers a wide array of everyday products at price points that are easily accessible to consumers. Its target customer is less affluent, so this makes sense. But the real differentiation point comes from its store footprint.

Image source: Getty Images.

Dollar General specifically looks to place its stores in rural areas where there is less competition from larger retailers like Walmart or Target. It can do this because it has small stores that don't need massive local populations to support them. This makes its stores far more convenient to its customers if all they need is to pick up a few items and not make a big trip to the store. Today, Dollar General has over 20,500 stores across the United States and Mexico.

There is a slight dichotomy here. While the company's bread and butter is essentials, like toiletries, it also sells higher-margin items like clothing and home goods. This is where things get interesting. In recent years the company had leaned more heavily into higher-margin, but non-necessity, goods. Those products haven't been selling as well as necessities, which carry lower margins. So, Dollar General has leaned back into what is selling even though the move is hurting margins. Giving customers what they want is not really a bad decision, even if it hurts the bottom line a bit.

What's going on with Dollar General's stock?

Wall Street became enamored with dollar stores a few years back, pushing these discount retailers up to massive heights. One of the big stories at the time was that higher-income buyers were trading down, which is fine, but it is not a sustainable benefit because they aren't the core customers. When that business dynamic shifted, dollar stores tanked. Competitor Dollar Tree (NASDAQ: DLTR) has seen its shares go through the same industry-driven price swing.

DG data by YCharts

But there's an interesting set of facts to consider today. For starters, Dollar General's shares have fallen all the way back to the point where they were in 2018. At the end of 2018, the company operated roughly 15,470 stores. As noted, Dollar General has over 20,500 locations today. That makes it roughly 33% larger than it was in 2018. The company has grown materially and is still growing as it continues to open new locations.

Meanwhile, the company came out of fiscal 2023 on a weak note. Net sales fell 3.4% in the fourth quarter of that year, with same-store sales up just 0.7%. For the full fiscal year in 2023, sales were up 2.2%, but same-store sales advanced only 0.2%. But as fiscal 2024 has progressed, it appears that the retailer is on a stronger footing. Same-store sales have been positive all year long, and new stores have helped to push net sales growth into the mid-single digits.

On the whole, it appears that Dollar General may have stabilized its foundation by going "back to basics." Given that investors have punished the stock so badly, contrarian investors might find it appealing again. The key is that the still-growing company is much bigger than it was when its stock price was last at the current price level. If the company has finally found a bottom, its larger size could lead to a material upturn in financial performance. The green shoots that are appearing suggest this inflection point could be near.

High risk and high reward

The truth is that Dollar General is probably not appropriate for most investors. There are a lot of moving parts at this still-growing retailer, and its financial performance has been weak. But if you have a contrarian bent and are willing to think long term, Dollar General looks like it is starting to get its business back on track. Given the growth that is taking place in its store base, that could quickly leverage into materially improved financial results.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.