Billionaire Mandel puts dollars on Dollar Tree
new
Dec. 13, 2012, 9:43 a.m. EST
About Meena Krishnamsetty
Ms. Krishnamsetty is editor and co-founder of
Insider Monkey, a finance website
that provides free insider trading and hedge-fund stock-holdings data. Her
articles draw upon the research and analytics of co-founder Dr. Ian Dogan,
Insider Monkey's research director, who holds a Ph.D. in financial economics
with a specialization in insider trading. Dogan has provided consulting services
to institutional investors and hedge funds, and managed a $200+ million fund
using a strategy he developed tracking
insider transactions.
Dogan authored the insider trading chapter of the soon-to- be-published “The
Handbook of Investment Anomalies” by Zacks Investment Research. Prior to Insider
Monkey, Krishnamsetty worked for Bloomberg Television, CNBC, NPR and in risk
management at Marsh & McLennan. Krishnamsetty has an M.S. in Journalism from
Columbia University’s Graduate School of Journalism.
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By Meena Krishnamsetty
At the beginning of July, billionaire Stephen Mandel's Lone Pine Capital did not own any shares of Dollar Tree
DLTR
-0.45%
. However, during the third quarter of the year, the Tiger Cub's fund
initiated a position in the stock, and by the end of September, Lone
Pine owned 3.9 million shares
(see Mandel's latest stock picks)
. The hedge fund has apparently kept right on buying, and according to a
recent 13G, owns 11.8 million shares, giving it 5.2% of the total
shares outstanding.
Dollar Tree wasn't the only dollar store in Mandel's portfolio at the
end of the third quarter: He and his team reported 8.3 million shares of
Dollar General
DG
-1.03%
in their 13F filing. It looks to us like the investment team at Lone Pine feels very optimistic about the industry as a whole.
In the fiscal quarter ending in October — the third of Dollar Tree's
fiscal year — revenue rose 8% compared to the same period in the
previous fiscal year. Comparable net sales were up 1.6%, as much of the
company's growth came from an increase in store count. Still, Dollar
Tree reported a remarkable 49% increase in earnings; we would say that
it's able to control costs even as it opens more locations, and with
margins actually increasing it doesn't appear to have achieved maximum
market penetration yet.
Dollar Tree, interestingly, is actually down 4% in the last year as
sentiment toward dollar stores has cooled. It's certainly possible that
an increase in consumer confidence and spending will drive customers
toward higher-priced retail, but the combination of growth and a falling
stock price has left the stock at only 16 times trailing earnings. It
wouldn't take much more growth for the company to justify that figure,
and Dollar Tree could certainly be a good value, even if its net income
begins growing much more slowly.
In addition, as a dollar store, Dollar Tree doesn't care much about the
state of the overall economy; its beta is 0.2. As a result, investors
would be somewhat protected from a downside surprise. Another
interesting point is that one of the company's board members was buying
the stock in mid-November.
A number of other hedge funds saw an opportunity in Dollar Tree during
the third quarter of 2012. Fellow Tiger Cub John Griffin's Blue Ridge
Capital increased its own stake by 21%, and closed September with 4.6
million shares in its portfolio
(check out more stocks Griffin was buying)
. Renaissance Technologies, founded by billionaire Jim Simons, also added shares.
Find more stock picks from Renaissance Technologies
.
Dollar Tree was one of two dollar stores to make our list of the most
popular retail stores among hedge funds for the third quarter
(see the full rankings)
. The other was Dollar General, which actually won the number-one slot.
Dollar General, which as we've noted was another Mandel pick, trades
very similarly to Dollar Tree: its trailing P/E is just a bit higher at
17, and both companies are valued at 14 times forward earnings
estimates. Dollar General also recorded close to 50% earnings growth in
its most recent quarter vs. a year earlier. It's tough to pick between
these two stocks given how similar they are.
Of course, there's another self-proclaimed dollar store — Family Dollar Stores
FDO
-12.13%
— and hedge fund favorites Wal-Mart Stores and Target Corporation are
sources of competition as well. Family Dollar doesn't seem like as good a
deal as the companies we've previously discussed. Its growth rates are
lower, and its trailing P/E is higher, at 20. Wal-Mart and Target are a
slightly different class of retailer. They are, of course, considerably
larger in terms of market cap; they are more closely tied to the
economy, with betas in the 0.4-0.5 range. Partly as a result of their
larger size, their growth rates are lower but still quite respectable.
With trailing P/E multiples in the 14-15 range (Target has a small
discount) it's possible that the dollar stores' superior growth rates
makes them better buys at their small premium to these more established
retailers. Billionaire Warren Buffett and Bill Gates' Foundation Trust
have the two largest positions among the billionaires we track (
see Warren Buffett's top picks
).
We can see why Lone Pine likes Dollar Tree. While there really isn't
much to distinguish it from Dollar General, these two companies are
growing nicely and don't look that expensive relative to the big boxes —
and they're certainly much better values than Amazon.com . We'd be
interested in examining those two dollar stores more closely.
Insider Monkey is a finance website that provides free insider trading
and hedge fund stock-holdings data. It tracks more than 400 equity hedge
funds. Follow it on Twitter @insidermonkey
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