How to Trade Dollar Tree (NASDAQ: DLTR) Now

Today we’ll walk you through a trade idea with Dollar Tree, Inc. (NASDAQ: DLTR) that could deliver up to 27% returns in the next 3-6 months.

Dollar Tree, formerly known as Only $1.00, is an American chain of discount variety stores that sells items for $1 or less. Headquartered in Chesapeake, Virginia, it is a Fortune 500 company and operates 15,115 stores throughout the 48 contiguous U.S. states and Canada

Analyst Ratings

According to TipRanks, 10 analysts are offering 12-month price targets for DLTR in the last 3 months. Among those, 2 analysts rate it a Buy, 8 rate it a Hold, and none have a Sell rating. The average price target offered by these analysts is $110.13, translating to a 17.81% Upside from current levels.

Why DLTR is trending?

The shares of DLTR tumbled by more than 12% on Thursday after the discount store company reported a mixed quarter featuring better-than-expected earnings but worse-than-expected sales. Dollar Tree managed to grow its earnings 12% year over year despite growing sales by only 1%.

Even though earnings of $1.23 per share did beat the consensus estimate of $1.00, the company’s revenue fell below Street forecasts. The company reported sales of $6.3 billion, below expectations for $6.4 billion.

CEO Michael Witynski’s worries about the “continuing and well-publicized challenges in the global supply chain, as well as higher freight costs and other inflationary pressures” that are pressuring the company’s margins, also contributed to the resulting sell-offs.

Investment management firms like Broyhill Asset Management also trimmed their stake in DLTR recently. The fund noted in its Q2 2021 investor letter: “We trimmed our investment in Dollar Tree after the stock’s first-quarter gains, but the company later disappointed investors with weak guidance that fell short of expectations. Despite the recent acceleration in same store sales growth at the Family Dollar banner – which weighed on the stock for years – the consensus is now more concerned with rising cost pressures eating into margins at the moment. At some point, sentiment will be just right.”

However, the retail chain still has few tailwinds. Although the freight companies are raising prices due to fuel costs and labor demands for higher wages, it would not be a problem that would be unique to DLTR. The same issue is going to hit Walmart, Target, and other retailers. But Dollar Tree prices will still be lower than other places, giving the company an edge. The company has also proven to be a favorite among customers during a recession and in times of inflation.

Here’s how to trade DLTR now.

DLTR Chart

On analysis, the weekly chart indicates that the stock has currently broken down from a long-term support area of $97.00, putting bulls on the sidelines for now. People with long positions on DLTR may also prefer to unload it today to avoid the risk of keeping the stock over the weekend, resulting in further decline of the stock.

There are also multiple bearish indications on the chart of the company.

#1 New resistance area: The stock had recently broken down from a strong support area, which has now turned into a resistance area. This has been marked as a red color dotted line. The stock may find it difficult to move above this level in the near-term.

#2 MACD below signal line: The MACD line (blue color) has currently crossed below the MACD signal line (orange color), indicating bearishness.

#3 Price below MAs: The price is currently below the 50-day as well as 200-day SMA, indicating overall bearishness.

#4 Bearish Stochastic: The stochastic in the daily chart has currently moved down. The %K line is also currently below the %D line. All these indicate possible bearishness.

However, there are also indications of a possible price reversal, as the RSI and the stochastic are currently near oversold levels.

Below is the bearish and bullish play for DLTR.

Recommended Bearish Trade (based on the chart)

Currently, the stock has broken down from the near-term support level with high volume, pointing to an upcoming short-term correction. This support-turned-resistance level is marked as a red color dotted line in the chart. Below are the stop loss level and target prices.

Sell Level: You can take short positions on DLTR below yesterday’s close, which translates to a price of around $93.00.

Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.

TP: Our target prices are $84 and if it closes below that level, $79 in the next 3-6 months.

SL: To limit risk, place a stop loss at $98.00. Note that this stop loss is on a closing basis.

Our target potential downside is 10% to 15% in the next 3-6 months.

For a risk of $5.00, our first target reward is $9.00 and the second target reward is $14.00. This is a nearly 1:2 and 1:3 risk-reward trade.

In other words, this trade offers nearly 2x to 3x rewards compared to the risks.

Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.

Recommended Bullish Trade (based on the chart)

Buy Levels: If you want to get in on this trade, the buy level for DLTR is in two scenarios. These are marked as green color dotted lines in the daily chart.

• Buy Level #1: You can purchase the shares of DLTR above the price of $103.00.
• Buy Level #2: You can purchase the shares of DLTR above the price of $118.00.

Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.

TP: Our target prices for various buy levels are as follows

• The target prices for Buy Level #1 ($103.00) are $117 and $130 in the next 3 to 6 months.
• The target prices for Buy Level #2 ($118.00) are $130 and $150 in the next 3 to 6 months.

SL: To limit risk, place a stop loss at the following levels.

• The stop loss for Buy Level #1 ($103.00) is $96.50.
• The stop loss for Buy Level #2 ($118.00) is $111.00.

Note that the stop loss is on a closing basis.

Target Upside: Our target potential upside is 10% to 27% in the next 3-6 months.

• Entry at Buy Level #1 ($103.00): For a risk of $6.50, our first target reward is $14.00 and the second target reward is $27.00. This is a nearly 1:2 and 1:4 risk-reward trade.
• Entry at Buy Level #2 ($118.00): For a risk of $7.00, our first target reward is $12.00 and the second target reward is $32.00. This is a nearly 1:2 and 1:5 risk-reward trade.

In other words, this trade offers 2x to 5x more potential upside than downside.

Risks to Consider: The stock may reverse its overall trend if it breaks down from the near-term support level with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.

Happy Trading!

— Trades of the Day Research Team