While markets are trading close to all-time highs, the upside is still primarily driven by mega-cap tech stocks that are part of the artificial intelligence (AI) race, such as Oracle (ORCL). However, several companies in sectors such as real estate, consumer discretionary, and energy are still trading at lower valuations, as investors are worried about slower consumer spending, elevated interest rates, and the lingering prospect of an economic slowdown.
Lululemon (LULU) and Dollar Tree (DLTR) are two large-cap stocks trading significantly below their record highs, which could make them attractive to value and contrarian investors. However, investing in beaten-down stocks is a tricky strategy, as you need to identify whether the pullback is due to macroeconomic factors or company-specific issues.
Notably, insider buying is one data point you can use to try and identify quality stocks trading at a discount. While there may be plenty of reasons for insiders to sell a stock, there is generally only one reason that insiders buy a stock - because they think the price will rise.
Lululemon and Dollar Tree are two beaten-down stocks insiders are buying this month. Let’s see if you should also include them in your equity portfolio.
The Bull Case for LULU Stock
Lululemon Athletica (LULU), valued at $33.3 billion by market cap, designs, distributes, and retails athletic apparel and accessories. These products are sold through a chain of company-operated stores, a network of wholesale accounts such as yoga studios, health clubs, and fitness centers, license and supply agreements, and direct-to-consumer.
Down 48% from all-time highs, Lululemon stock has trailed the broader markets in recent years. In fiscal Q2 of 2024 (ended in July), Lululemon reported revenue of $2.37 billion and adjusted earnings of $3.15 per share, compared to estimates of $2.41 billion and $2.93 per share. It was the company’s first revenue miss in two years, as results were negatively impacted by slowing growth and the botched launch of a highly anticipated product.
For fiscal 2024, LULU lowered its sales guidance to a range between $10.375 billion and $10.475 billion - down from its previous midpoint estimate of $10.75 billion, and short of Wall Street's average estimate of $10.62 billion. Management also reduced its earnings forecast, which is now between $13.95 per share and $14.15 per share, compared to its previous midpoint estimate of $14.37 per share.
Lululemon CEO Calvin McDonald bought 4,000 company shares on Sept. 3 at $260 each for a total investment of $1.04 million, which might spur investor optimism. This marks the first insider buy on LULU since last March - and remarkably, McDonald's first purchase of LULU since he became CEO of the retailer in 2018.
Out of the 27 analysts covering LULU stock, 14 recommend “strong buy,” two recommend “moderate buy,” nine recommend “hold,” one recommends “moderate sell,” and one recommends “strong sell.”
The average target price for LULU is $318.57, indicating an upside potential of 20% from current levels. Priced at three times forward sales and 19 times forward earnings, LULU stock trades at a reasonable valuation.
Is Dollar Tree Stock Worth Buying?
Valued at $14.98 billion by market cap, Dollar Tree (DLTR) stock is down 60.6% from all-time highs, and recently set a new three-year low. The stock fell more than 22% on Sept. 4 after its fiscal Q2 results, as its revenue of $7.38 billion on adjusted earnings per share of $0.97 fell short of Wall Street's estimated $7.49 billion and $1.04, respectively.
Dollar Tree noted that increasing pressures on middle-and high-income customers have led to lower demand. In the last 12 months, Dollar Tree has reported revenue of $30.97 billion, an increase of 5.7% year over year, slower than its sales growth of 8% in fiscal 2024.
At the midpoint of its forecast, Dollar Tree expects revenue of $30.75 billion and earnings of $5.40 per share in fiscal 2025, lower than its previous guidance of $31.5 billion and $6.75 per share, respectively. The lower forecast reflects softer sales and costs related to converting 99 Cents Only stores and higher expenses associated with settling litigation claims related to customer accidents and other store incidents.
On Sept. 6, Dollar Tree board member and finance committee chair Daniel Heinrich, who formerly served as CFO of Clorox (CLX), purchased 2,200 shares at $68.27 for a total outlay of about $150,194. Heinrich has been purchasing DLTR at semi-regular intervals over the years - and he apparently thinks the stock is a bargain at current levels, as he upped the share count by more than double from his March 2024 purchase, when DLTR was trading around $127.85.
Out of the 21 analysts covering DLTR stock, nine recommend “strong buy,” 11 recommend “hold,” and one recommends “moderate sell,” for an overall “moderate buy” consensus.
Priced at 0.5x forward sales and 12.9x forward earnings, DLTR stock is relatively cheap. The 12-month mean target price for DLTR stock is $82.59, indicating a 14.8% upside to current prices.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
