1 Growth Stocks Down 68% to Buy Now

There is no denying it Dollar General (DG 2.70%) shareholders were hit hard last week. In response to the discount retailer’s failure to post a second-quarter profit and lowered revenue guidance for the rest of the year, shares fell 32% on Aug. 29, the worst day in the stock’s history.

Most investors are more than a little wary of owning shares in the discount chain right now. But if you think the darkest day is before the dawn, and the stock is down 68% from its 2022 peak and trading at a seven-year low, now might be the time to buy shares in this wisely positioned company.

“I have financial problems”

Dollar General delivered a major disappointment with its second-quarter results. While overall sales rose 4.2% year over year to $10.21 billion, same-store sales (comps) growth was an anemic 0.5%. Operating profit fell 20%, dropping earnings per share from $2.13 a year earlier to $1.70 this time around. Analysts were expecting earnings of $1.79 per share on revenue of $10.37 billion.

Stoking the bearish flames, it lowered its full-year 2024 sales forecast. The retailer had been modeling revenue growth of 6% to 6.7%, driven by more savvy consumer spending. It now expects revenue growth of just 4.7% to 5.3%, with comparable growth trimmed to an expected range of just 1% to 1.6%.

But perhaps the biggest factor in the post-earnings decline was the fact that the numbers contrasted so sharply with those from similar sources. WalmartThe company reported a 4.8% revenue increase, driven by a 4.2% increase in same-store sales in the U.S. The retailer also lifted revenue and profit forecasts for the full year.

What’s happening? The key is the difference between the two companies’ typical customers. As CEO Todd Vasos commented on the second-quarter earnings conference call, “the lower-end consumer is still very financially constrained, especially in terms of their ability to feed and support their family.”

With Dollar General’s core, value-oriented customers unable to continue spending as they have in the past, the retailer is largely on the defensive until things improve. But that could take some time, and in the meantime, the company’s situation could remain dire. Given that, it’s no wonder investors are panicking.

Remember one important principle about how the economy and the stock market work.

Dollar General’s worst-case scenario is its current reality

Dollar General can’t compete with bigger players like Walmart or Objective. If anything, it’s mostly he avoids competing directly with either chain. While Target and Walmart stores are typically located in densely populated areas, 80% of Dollar General stores are located in often underserved small towns with populations of less than 20,000.

The company also targets lower-income households, which are more likely to visit such locations, according to research firm Numerator. Custom-sized products, for example, allow for lower prices. Much of its assortment is also private-label, giving the retailer even more control over how it meets the needs of its most frequent customers.

And the strategy usually works out great. The discount retailer saw incredible growth in revenue and reach between the end of the 2008 subprime mortgage crisis and the start of the pandemic.

But the circumstances of 2021 are unusual. Namely, inflation is running high. The U.S. consumer price index is now 21% higher than it was four years ago, a figure that likely understates the actual effective cost of living growth. Income growth simply hasn’t kept up. That’s why for most of the past three years, Walmart has touted that most of its market share gains came from households earning more than $100,000 a year — a group that’s also looking to stretch its dollars. McDonald’s recently reported disappointing quarterly results, largely because, according to CEO Chris Kempczinski, customers are “still feeling the effects of the economic downturn and higher living costs.” And that reflects recent observations by executives PepsiCo and other customer service-oriented companies.

That’s a problematic dynamic for Dollar General, because its core customers—lower-income, rural households that have been hit hardest by inflation—are not changing how they shop or what they buy. They’re simply spending less. That idea is underscored by similar results from direct competitors Dollar TreeIts Dollar Tree brand saw same-store sales rise by a modest 1.3% in the latest quarter, while its Family Dollar brand saw same-store sales decline by 0.1%.

In light of all this, it’s no wonder investors are worried about the retailer’s foreseeable future. But there’s something the market seems to be forgetting.

For investors with a strong stomach, the risk is worth the reward

That means the economy is reliably cyclical but ultimately growing. The past few years have been an extreme exception to that norm, creating an affordability crisis that is now stifling consumer spending.

There has never been any question about Dollar General’s business strategy. The economy, which usually works in Dollar General’s favor, will do so again sooner or later, and probably sooner than Later.

And waiting for clear evidence of that rebound to dive into Dollar General stock could be a strategic mistake. Stocks have a funny way of trading predictably, reflecting likely outcomes a few months to a few years into the future.

So while it’s struggling now, Dollar General is likely to start doing better soon. Its stock should start pricing in such a turnaround even sooner. Indeed, now down 68% and trading at a seven-year low, the worst-case scenario may already be priced into the stock, or more.

Taking the plunge now is not for the faint of heart. The likely volatility could prove worrying, even if the net effect is bullish. Keep that in perspective if you feel like diving into this.

But if your gut tells you to jump in, don’t be afraid. As Warren Buffett says, be greedy when others are greedy and be greedy when others are fearful. And the market is clearly fearful of Dollar General right now.