Dollar Tree stock won't be at a discount for much longer

Key Points

• Shares of Dollar Tree have been rallying since last October's low. 
• Expectations are high for consumer discretionary spending to boost the company's bottom line this year. 
• A recent analyst upgrade should see shares climb to new highs in the meantime. 

For much of last year, it was looking like shares of Dollar Tree, Inc NASDAQ: DLTR were all set to return to the sub-$100 price level. It had only been in 2022 that they'd really broken through, so investors would have been forgiven for feeling despondent at the thought of the full retreat. 

By last October, the stock had fallen more than 40% from its all-time high. The drop was all the more painful because it came during one of the worst cost-of-living crises in living memory. As a discount retailer, Dollar Tree's business model is set up to capture market share when consumers feel squeezed. Interestingly, however, since equities came back in vogue in November, on the back of inflation looking increasingly tamed, Dollar Tree's shares have also bounced. 

Fresh upgrade

Into the start of January, DLTR shares were up 40%, and while they've softened a little since then, all the signs point to this being the start of a new upward trend. So said the team over at JPMorgan Chase & Co. NYSE: JPM, at least, when they upped their rating on Dollar Tree shares yesterday morning. Having previously had the stock rated Neutral, they made the bullish change to an Overweight rating while giving it a fresh price target of $157. 

From where shares closed out last week, that's pointing to an upside of almost 20%. If shares hit that target in the coming weeks, they'd also soar past their recent high at $145. And in doing so, it would confirm an uptrend has well and truly formed. It will be interesting to see if the stock can build the necessary momentum on the back of this upgrade, especially with equities performing so well right now. 

For context, the benchmark S&P 500 index finished at a record high last night. That could be a sign of just how bullish investors are about the coming quarters. JPMorgan clearly has no concerns about them making the move north and made a point of highlighting the company's unique back-end buying process and fixed price point structure, which they see as a strategic advantage over the competition. 

They also zeroed in on recent comments from Dollar Tree's CEO, Rick Dreiling, who pointed out that periods of disinflation or deflation can be leveraged as multi-year merchandising opportunities, particularly when it comes to enhancing Dollar Tree's product quality and pack sizes. With inflation readings now favoring both consumers and stocks, Dollar Tree is expecting a rise in discretionary spending to boost its bottom line heading into 2024.  

Wall Street clearly agrees, too. Of the major discount retailers out there, Dollar Tree has been outperforming, its -5% drop since the start of 2023, comparing quite favorably to the 45% drop seen in Dollar General Corp's NYSE: DG stock. 

Getting involved 

All in all, there's a lot here to like for those of us on the sidelines. It's not without its risks, however, and the bears will point out how yesterday's opening jump off the back of JPMorgan's upgrade was mostly given up by the close. That's something you don't really want to see in a stock that still has to convince investors it's not in a downtrend anymore. 

Let's see if shares can stabilize around the $135 level this week, as that would give them a strong springboard to work from in February. There are enough heavyweight voices in the bull camp to suggest this is the most likely path shares take. 

The team at Truist Financial Co. NYSE: TFC reiterated its rating on the stock at the end of December and boosted their price target to $149, while the Telsey Advisory Group also reiterated their Buy rating in November and gave Dollar Tree a price target of $160. So, comparatively speaking, Dollar Tree shares are currently trading at a substantial discount. However, with equities as hot as they are, it's a discount that's unlikely to be available for long.