Hedge Funds Are Bullish on This Retail Stock Now

August 10, 2024

5 minutes read

We recently compiled a list of the 10 Best Retail Stocks To Buy Now. In this article, we are going to take a look at where Dollar General Corporation (NYSE:DG) stands against the other retail stocks.

Tech is Disrupting Retail

The rise of tech and artificial intelligence (AI) in the past few years has had an impact not only on the tech sector but on the entire market. The retail sector is no stranger to this impact, with analysts now considering tech-enabled innovation as one of the core drivers in the growth of the retail sector. As a result, those retailers that are taking the tech expansion seriously and are making investments to incorporate new technology in their operations are finally beginning to catch the market’s attention.

On June 24, Simeon Gutman, analyst at Morgan Stanley, joined CNBC’s “The Exchange” to discuss the impact of tech and AI on retailers and how these companies are making use of tech to drive up profit margins. Here are some of his comments on the retail companies to keep an eye on in this respect:

“Walmart’s the one that comes to mind the first… with Walmart, you’re hitting the nail on the head with several of these aspects of tech diffusion, and on top of it, they’re gaining market share in terms of tech diffusion. AI is easily one of them, big scale, lot of data, lot of opportunity to go through their data and enhance both the frontend of their business, drive more sales to customers, make things easier, and improve the backend.”

According to Gutman, big-box retailers are the sector’s winners when it comes to incorporating innovative tech in their internal operations. Because of such innovation in retail, and its consequent impact resulting in increased profit margins for retailers, there may be room to argue that retail is fast making a comeback in the market.

Retail Sector Outlook 2024

According to the WTW Global Retail Survey for 2024, 52% of retailers this year generally expect higher profitability within two years. Additionally, more retailers today (48%) are looking to incorporate artificial intelligence in their operations to offer personalized shopping experiences to their customers. However, the rise of tech and AI in the sector has also resulted in some retailers (43%) voicing concerns about higher cybersecurity risks arising through a greater reliance on new technologies.

Despite the risks involved, most retailers today are heading towards AI incorporation to meet customers’ demands. According to the survey, AI is primarily favored by online-only and electronic retailers because of its potential for catalyzing growth. By helping retailers automate their processes and supply chain operations, AI and new technologies can enable retailers to deliver personalized experiences and recommendations to their customers. This is an exceptionally important feature in today’s market, with consumers becoming more reliant on new technologies and their benefits in everyday life.

Our Methodology

We sifted through ETFs and online rankings to compile a list of 25 retail stocks. We also used the Finviz stock screener to double check we didn’t miss any popular stocks. For this list, we have considered apparel retailers, discount stores, department stores, and home improvement retailers. We selected and ranked 10 stocks, from our initial pool of 25, that were the most popular among institutional investors. The stocks are ranked in ascending order of the number of hedge funds holding stakes in them.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

A busy shopping aisle filled with discounted items in a retail store.

Dollar General Corporation (NYSE:DG)

Number of Hedge Fund Holders: 49

Dollar General Corporation (NYSE:DG) was spotted in the 13F holdings of 49 hedge funds in the first quarter, with a total stake value of $1.6 billion.

Dollar General Corporation (NYSE:DG) is a consumer staples merchandise retail company based in Goodlettsville, Tennessee. The company offers consumable products, such as paper and cleaning products, paper towels, bath tissues, and storage bags. It also offers home products such as kitchen supplies, appliances, and much more.

Dollar General Corporation (NYSE:DG) has been working to expand its product offerings to include fresh produce such as fruits and vegetables. The company’s private brand, Clover Valley, is operating on this front. Dollar General Corporation (NYSE:DG) is also currently benefitting from weaker competition in the market, especially with Dollar Tree heading towards the closure of several of its locations, while Dollar General Corporation (NYSE:DG) is planning on opening up at least 800 new stores in 2024.

As of June 28, the average analyst price target on Dollar General Corporation (NYSE:DG) is $149.3, with a high forecast of $170. Telsey Advisory Group analysts also maintained an Outperform rating on the stock on May 31.

This is what Artisan Partners said about Dollar General Corporation (NYSE:DG) in its fourth-quarter 2023 investor letter:

“Our biggest full-year detractors included energy holdings Schlumberger and EOG and 2023 purchases Baxter International and Dollar General Corporation (NYSE:DG). Dollar General, a discount retail chain in the US, has dealt with a few struggles. The retailer had previously benefited from COVID stimulus checks, reflected in the bump it experienced in revenues and margins. However, the effects have worn off, and its core consumer has been hurt by inflation, stiffer economic conditions, lower tax refunds and reduced SNAP benefits. Margins are also under pressure due to labor costs, shrink and markdowns. Some of the issues are likely self-inflicted. After years of focusing on store growth to drive the top line, store standards have suffered. Addressing store standards is needed to turn around flagging traffic, comps and customer satisfaction. On the positive side, discount retail due to its trade-down feature tends to be a defensive business during economic slowdowns. Dollar General has a strong market position and faces less competition than other discounters due to its largely rural footprint. The business’s value proposition is everyday low prices, a convenient format and proximity. The company has leverage due to capital expenditures, but interest coverage of ~9X is strong. From a valuation perspective, the froth from the pandemic, when it traded in the low- to mid-twenties, is gone. So, we aren’t paying for margin upside or store growth. Those would be bonuses. If the company can continue to grow revenues, generate cash flow and buy back stock, we still see a path to success.”

Overall DG ranks 7th on our list of the best retail stocks to buy. You can visit 10 Best Retail Stocks To Buy Now to see the other retail stocks that are on hedge funds’ radar. While we acknowledge the potential for DG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.