Dollar Tree (NASDAQ: DLTR) Stock a Buy: The Perfect Recession Play

Although the stock market has been in a clear uptrend for months, there are plenty of valid concerns about the state of the U.S. economy at this point. Unemployment remains high and we are still learning about the true extent of the economic damage caused by lockdowns and the pandemic. In early June, the National Bureau of Economic Research officially declared that the U.S. entered a recession in February 2020, which ended the longest economic expansion in history. This type of market environment supports the strategy of looking for stocks that are set to benefit during a recession.

One company that offers discount consumer goods looks like a fantastic buy at this time. Dollar Tree (NASDAQ:DLTR) is a leading operator of discount variety stores that features a wide selection of consumer staple goods at extremely low prices. Although the company hasn’t been outperforming the market average, the stock is looking very attractive as more and more consumers cut back on their spending and seek ways to save on everyday purchases. Below, we are going to take a deeper look at Dollar Tree stock and determine why it could be the perfect recession play.

Next Level Discounts

When it comes to finding the lowest priced consumer goods, there are discount retailers and then there is Dollar Tree. This company offers a variety of different products priced at $1 dollar or less, which means shopping at Dollar Tree is less expensive than other discount retail giants like Walmart and Target. This pricing model should allow Dollar Tree to capture tons of business and market share throughout the recession and reward investors with gains in the process. We are currently looking at tens of millions of Americans that are without jobs due to the pandemic, and unfortunately, many of those jobs don’t look like they will come back any time soon.

If you take a look at how Dollar Tree stock performed during the last recession, it’s easy to see the potential. From October 2007 until October 2011, Dollar Tree shares rallied up roughly 200% while the overall market was struggling. It’s hard to expect dramatic gains like that this time around, but Dollar Tree should still perform very well throughout the current recession and in years to come. Combine that with the fact that unemployment remains high and the government’s $600 CARES Act unemployment benefits are ending in July and you have to like Dollar Tree’s earnings growth prospects going forward thanks to their next level discounts.

Strong Growth Story

Another great reason why Dollar Tree looks like a great buy at this time has to do with the strong growth story. It’s a company that has been opening new stores at a rapid pace, and it even opened 99 new locations during an uncertain Q1 2020. At this time, Dollar Tree operates 15,370 total stores in 48 states and 5 Canadian provinces. Even with the pandemic occurring, the company plans to add 500 new stores during FY 2020. It ended Q1 with cash and cash equivalents of $1.755.1 million, which offers reassurance that the company’s balance sheet is strong enough to continue the expansion and deal with any financial issues stemming from an uncertain economy.

Dollar Tree also acquired Family Dollar back in 2015 and although the results haven’t been as positive as many investors hoped, it seems that the acquisition might start paying off soon. Same-store sales for Family Dollar increased by 15.5% in Q1 and Dollar Tree’s consolidated net sales increased by 8.2% to $6.29 billion. Don’t be surprised to see Dollar Tree exceed analyst expectations again in Q2 and continue their growth for years to come.

China Tensions Biggest Risk

Some investors might be concerned about the risk of another economic shutdown resulting from COVID-19, but Dollar Tree stores have been open throughout the pandemic since it is considered an essential business. However, no stock is without its risks, and it’s important to note that the biggest risk for Dollar Tree going forward is increasing tensions between the United States and China.

Dollar Tree is heavily dependent on Chinese-made goods that allow the business to sell its products at such low prices. If the tensions between the U.S. and China rise, more tariffs on goods imported from China could be in order. This would put Dollar Tree at risk of paying more for their Chinese products and experiencing negative impacts on its bottom line. If you are considering a position in Dollar Tree, make sure you understand that this risk is on the table.

Recession-Proof

Even when the economy is doing well, Dollar Tree is a business that has frugal shoppers driving its growth. The fact that the U.S. is in a recession means that this stock has lots of potential going forward. Many Americans will need to keep their expenses as low as possible as layoffs continue, and Dollar Tree can help them accomplish that goal. It’s hard to find value in today’s market, but this recession-proof stock looks like a great deal. Although there is some risk here regarding ongoing tensions with China, adding shares of Dollar Tree could eventually end up being the perfect recession play.