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Chapter 1: What is the main topic discussed in this episode?
We're talking short sellers and turnarounds today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Lou Whiteman and Matt Frankel.
We're going to be getting into short sellers, specifically short selling research firms after the court decision that came down on Citron Research earlier yesterday. We're also going to look at investor questions related to real estate on the private side, not necessarily REITs that we normally talk about on a publicly traded entity show. But first, we're going to start with Dollar General.
And I wanted to bring this one up specifically because it's been like a turnaround story for several years. It's not the most headline-grabbing company, but during the 2010s, Dollar General was one of the best-performing stocks. It handily beat the S&P 500. Companies that we think of now, like Mag7 companies, like Microsoft and Alphabet, Dollar General was beating it.
That kind of came to a crashing halt right around 2022 as some trouble started to pile up for various reasons. And the company's been trying to get its act together for a while now. And today, this morning, it just reported earnings and the numbers said they beat expectations and raised guidance. And yet the stock is down about almost 3% as we're taping this.
So Matt, was this a good result or was it just kind of beating bad expectations for what is now kind of a downtrodden stock?
Yeah.
Yeah, well, I mean, Dollar General, you're right, they beat expectations on earnings. On revenue, they missed expectations a little bit. It wasn't all good. Same-store sales, for example, grew 2% year-over-year. That's less than the rate of inflation. So, on a real basis, they actually lost same-store sales. On the other hand, I mean, their margins look good.
Gross margin rose 65 basis points, net income increased by 13%. And as you mentioned, earnings beat expectations. So it missed slightly on the top line, beat on the bottom. I'm not shocked that the stock is under pressure. The company is making good progress on its plan to renovate and improve its existing stores, which is a big cornerstone of their turnaround plan.
They did 1,400 of them in the first quarter alone. They're aiming for a little over 4,200 for the entire year. They continue to open stores when they see opportunities. Almost 200 new stores were opened during the first quarter. They maintained their revenue guidance for the full year, but they raised their earnings guidance. So I'd say things are going okay.
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Chapter 2: What challenges did Dollar General face during its turnaround?
Because yes, there's definitely making progress here, right? This is a promising start to what figures to be a long-term turnaround. They were beaten down, rightfully so, I may add. And the market right now is not in the, I don't think they want to celebrate just one quarter of a turnaround.
they have an ambitious plan there's nothing in this quarter suggests that there's anything wrong with the plan but this is competition is intense here in retail there is no guaranteed winner you are not entitled to continue to exist so there is real downside risk turn around still early days i think you know you give credit where credit is due but um i think the market's right to be cautious here and not to just be cheering just because of one quarter's results
I feel like the three of us have been in the same experience here for a while, where I've been to a few value investing conferences over the past few years. And I think I've heard so many dollar general pitches at these value investing conferences. I feel like I could set my watch to it and almost do the whole pitch by memory now. It all had struck the exact same chords. It was like,
Former CEO Todd Vezos is now back in charge again after that 2020-2010 kind of run-up, and he's the one in charge again. The stuff that's a problem, it is fixable, right? And if you focus on the current store fixing, like you were talking about, Matt, in the most recent numbers, instead of...
really like trying to blow out your store count, which was part of the growth narrative and why it was so successful. You know, all these things happen and, you know, boom, we're back at a two times price to sales ratio, eight times book value. And some of these things are coming true. Sales continue to grow. Margins are improving.
But at the same time, that valuation standpoint, it hasn't come anywhere close to it. We're still less than one times sales. I think book value is something like two, two and a half times book. The valuation is way different. And this is the challenge, in my opinion, of investing in turnarounds. And I wanted to use Dollar General as a good example here.
But we could have, I don't know, done advanced auto parts or the 15 other long-term turnarounds that sometimes have not quite gotten off the ground. It's not just a bet on the fundamentals of the business returning. It's also the narrative that drives that valuation of what people think about it. And I know I certainly have touched the hot stove a couple of times.
I don't even know if I can mention some of them because they're so small these days that I think we could move the stock, so I don't even want to mention them because they're in such bad shape.
But with that in mind, one, if you want to share any turnaround bets that you made that didn't go awry or did, and what advice would you give to investors when it comes to actually investing in these turnaround ideas or fallen angels like Donald General?
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Chapter 3: Did Dollar General's latest earnings report indicate a successful turnaround?
So that's what I look for.
Yeah. So first off, I think it's so important to look at the competition just as a sign. And that's definitely true here is that, look, a company that has sort of fallen from grace or have lost the customer's eye, if you're a consumer facing company, you can execute very well and it can be hard to get back on the radar, get back, you know, in good graces with the customer.
So I think that is a huge wild card that you have to look out for here. But generally speaking, Tyler, I think you hit on it. Narrative is so important. We are surrounded by data. The market knows everything that's going on at any given time these days, right? The hard part is knowing when the market will care about the data.
A lot of sharp moves we see, and this is a Dollar Tree thing, this is anywhere, but a lot of sharp moves, it's not because there's some new surprise. It's just we suddenly started caring about something we already knew about. Look at the SaaS apocalypse.
We've known what AI wanted to do forever, but suddenly this was cutting 50% off the price of the stocks because suddenly we actually cared about it. It was in our consciousness. In a turnaround story, the only antidote to narrative is patience. If the turnaround is working, if the data looks good, the market will catch on eventually. But that eventually can take a long time.
It's really hard to know when, so patience can be needed.
I find it kind of funny because you said Dollar Tree instead of Dollar General, but I actually feel like this whole segment could have been done with Dollar Tree instead of Dollar General. We might have come to the same conclusions. But before I go, do anybody want to touch the hot stove? Like a turnaround that worked for you in your portfolio? One that flamed out, didn't quite work out?
I'll do one of each, and I bought them at the same time, which is, again, to show you that they don't all work out. I bought Garrett Motion and Simply Good Foods at the same time. One of them, I think, is a 3X now, and one of them is down 60%. I like both equally going in.
Tyler, you were betting on Transocean's turnaround with me, so I'll just leave it at that.
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Chapter 4: What factors should investors consider when investing in turnaround stocks?
But the regulations on this part has just been like the Wild West. And really, you're throwing individual investors to the wolves here. The reason that this has been reserved for the rich is because they could hire an army of analysts and lawyers to look over this stuff. And us weekend hobbyists don't really have the assets to really do that.
Yeah, I mean, I'd stay away. And this comes from someone who invested in several of these private crowdfunded real estate deals over the past five or six years. The numbers are not in your favor. And this was an analysis. Over 50% of deals listed on the CrowdStreet platform, for example, failed to meet their targets. More than 10% went to zero.
Several platforms have failed completely in the past five years. And total documented investor losses across the sector were more than $400 million across just the major platforms since 2020. Now, I'm not saying real estate crowdfunding is a scam. It's not. But the marketing really oversells the expected returns in almost all cases.
Apologies to Matt looking for advice on this, but I think the best advice we can give for a lot of these things is maybe it's best to stay away and stick to the publicly traded stuff. Like I said, maybe it's one or two percentage points lower for publicly traded REITs, but you get a lot of the advantages of liquidity and transparency.
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provide for informational purposes only.
To see our full advertising and disclosure, please check out our show notes. Thanks to our producer, Dan Boyd, and the rest of The Motley Fool team. For Lou, Matt, and myself, thanks for listening, and we'll chat again soon.
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