Stock Analysis

Dollar Tree (NASDAQ:DLTR) pulls back 9.8% this week, but still delivers shareholders decent 17% CAGR over 3 years

  •  Updated
NasdaqGS:DLTR
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One simple way to benefit from the stock market is to buy an index fund. But if you pick the right individual stocks, you could make more than that. For example, the Dollar Tree, Inc. (NASDAQ:DLTR) share price is up 60% in the last three years, clearly besting the market return of around 24% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 5.3%.

Although Dollar Tree has shed US$4.1b from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.

Our analysis indicates that DLTR is potentially overvalued!

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

Dollar Tree became profitable within the last three years. That would generally be considered a positive, so we'd expect the share price to be up.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

earnings-per-share-growth
NasdaqGS:DLTR Earnings Per Share Growth November 23rd 2022

It is of course excellent to see how Dollar Tree has grown profits over the years, but the future is more important for shareholders. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

A Different Perspective

It's good to see that Dollar Tree has rewarded shareholders with a total shareholder return of 5.3% in the last twelve months. However, that falls short of the 9% TSR per annum it has made for shareholders, each year, over five years. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Dollar Tree , and understanding them should be part of your investment process.

But note: Dollar Tree may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

Valuation is complex, but we're helping make it simple.

Find out whether Dollar Tree is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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