Shares of discount retailer Dollar Tree Inc. (NASDAQ: DLTR) closed trading Friday up 5.95%, after peaking at about 7% higher late in the afternoon. Its trading volume was also up: Over 4.1 million shares changed hands -- about 1.9 million shares more than the average daily volume over the past 90 days.
The simple reason that explains today's gains? Well, it's nothing beyond the timing of more buyers looking to invest in shares and bidding up prices than there were sellers pushing prices down. Chances are, some of today's buying was driven by investors seeing a favorable entry pointThe stock price had fallen more 10% from its recent peak prior to today's gains. Even after today's jump, Dollar Tree's stock is still down 9% from its high.
It can be frustrating to see a stock price move sharply up or down without a clear reason why. This is an excellent time for investors to acknowledge that, over the past year, the market has had incredibly little volatility, and at some point, turmoil such as we've seen in the past week was bound to happen. There will be plenty of stocks that move sharply with little or no explanation.
So instead of getting caught up in trying to figure out the daily machinations of the markets, the most-successful investors focus on the fundamentals of the businesses they are interested in owning. In Dollar Tree's case, its recent results have been pretty solid. It delivered a 6% sales increase in its third quarter -- half of that coming from very impressive 3.2% comps growth. These results have driven nice returns for shareholders, too; the company's stock price is up almost 40% over the past year.
The big takeaway for investors following the company is simple, too: You'll never outguess the market in the short term. But if you like Dollar Tree's business and prospects -- and if management can keep executing on its growth strategy and turn higher sales into more earnings -- the long-term business results should deliver long-term gains in the stock price.
Dollar Tree's stock trades for just under 20 times expected 2018 earnings, not a cheap forward P/E, but also not as expensive as a lot of other stocks sport. While I'm not willing to call it a lock that Dollar Tree beats the market, I think management should continue to deliver decent returns, and make investors money over the next three to five years.
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