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Montreal-based Dollarama has a debt/equity ratio below 30 per cent, and a return on equity over 20 per cent. (Deborah Baic/The Globe and Mail)

Montreal-based Dollarama has a debt/equity ratio below 30 per cent, and a return on equity over 20 per cent.

(Deborah Baic/The Globe and Mail)

Schizas' Mailbag

Dollarama can’t escape the winter blues Add to ...

Hi Lou,

Happy capitalism.

I was wondering about your thoughts on Dollarama. Will it grow internally, or will this stock grow through acquisitions,or a combination of both?

I have had this stock since mid 2010 and I love it. The management is great!! Your thoughts on the future of this company.

Thank you,

Frank

Hey Frank,

Thanks for the assignment and congratulations on what has been a great investment. Dollarama Inc. has been on a run since it went public in 2009 at $19.50. Management has announced that they intend to grow to 1,000 stores from their current count of just over 800 within the next 18 months. From the research conducted on your behalf it appears that the company has traditionally grown organically. There was one acquisition in 2001 when it bought 60 locations from a bankrupt operator in Ontario. That’s not to say that the company couldn’t buy up smaller competitors but the greater threat is from competitors encroaching on their turf.

A review of the charts will help inform my thoughts on how best to proceed with your investment.

The three-year chart portrays a stock that has enjoyed a sweet advance with tests of support along the moving averages but no breaches. What is evident is that the shares have pulled back from the 52-week high of $90.74 that was touched back in November of 2013. The MACD and the RSI both generated sell signals in late October of 2013. The stock caught a bounce off the 200-day moving average in February of 2014 and is now meeting resistance near $88.00.

The six-month chart provides a close up of the sell signal generated by the momentum indicators in late October just before the shares began their retreat. The indicators also produced a couple of buy signals. One in December and the other in February. Currently it appears that the MACD and the RSI are turning lower suggesting that the resistance at $88.00 may take a bigger effort to overcome.

The company will report its fourth quarter and fiscal year results on April 9, 2014. I expect most retailers in Canada will have suffered through the harsh winter with customers staying off the roads and out of the stores, putting pressure on their results. I don’t believe that DOL has escaped the consequences of weather that has hit the entire economy.

The long-term issue for the company is how to will deal with increased competition from other discounters who want what DOL has.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lou@happycapitalism.com.

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