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Here’s Why Semper Augustus Investments Trimmed its Dollar General (DG) Position

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Jose Karlo Mari Tottoc
·6 min read
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Semper Augustus Investments Group, an investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. In the lengthy letter, the fund talked about the activities in their portfolio and other important updates which they quoted, “The Path From Deflation; Expedition Everest; and – Berkshire: The GOAT Goes Full Repo”. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Semper Augustus Investments Group, in their Q4 2020 Investor Letter, said that they did a material trim in their position in Dollar General Corporation (NYSE: DG) throughout the year. Dollar General Corporation is a variety store company that currently has a $45.7 billion market cap. For the past 3 months, DG delivered a -15.17% return and settled at $186.5 per share at the closing of March 2, 2021.

Here is what Semper Augustus Investments Group has to say about Dollar General Corporation in their Q4 2020 investor letter:

"A material trim in Dollar General throughout the year typifies portfolio activity. We had acquired Dollar General in March 2017 following a two-year, 30% slide in the shares. The convention that Amazon and Internet distribution were destined to destroy all retailers contributed to indiscriminate selling in all things brick and mortar. Dollar General has one of the most defensible, Internet-immune and growing presences in all of retail. Their small store, small footprint, small basket size, largely rural stores make Internet distribution very difficult and expensive. The initiative-driven management team blocks and tackles extremely well. As an example, a focus on refrigerated coolers makes the intra-week trip for necessities like milk a Dollar General mainstay for the rural family. Too far to drive to Wal-Mart in a larger town and too competitive on price versus local competitors like convenience stores or pharmacies, Dollar General possesses extremely durable advantages. When Amazon figures out how to economically deliver a quart of milk and a head of lettuce to Knob Noster, Missouri, population 2,767 according to the sign at the edge of town, then we’ll worry. In the meantime, the company will open 1,000 new stores each year, will recondition or relocate another 1,000 and will perhaps double its systemwide square footage over the next decade.

With any investment made at Semper, price matters. At the initial acquisition price of $69 we paid about 15 times the then earning power of a retailer earning high teens returns on capital and low 20’s on equity. Aided by the cut in the U.S. corporate tax rate to 21% from 35% at the end of 2017 and with ongoing growth in units and increasing margins, the stock climbed to a high of $167 per share in 2019, 24 times earnings at that point. Come the virus, Dollar General saw its shares drop to a low of $125 in the March selloff. It was obvious that not all businesses would be harmed. Dollar General stores and the distribution system would be critical to feeding and supplying not only its rural but also its suburban and urban customers. The company has been a major beneficiary of the pandemic, seeing very high comparisons in year-over-year growth in same store sales. Weak economic times always favor Dollar General as its typical customer, with half of household income relative to the national median, leans more frequently on the national food stamp program, now known by its catchy name, the Supplemental Nutrition Assistance Program, SNAP for short. Who said bureaucrats don’t have senses of humor?

The boom in demand for Dollar General, which sells smaller size packages but at industry low prices per ounce or unit, sent the shares ever upward, trading as high as $223 in October, 22 times what the company will earn in the 2020 fiscal year ending in January. There is no doubt that sales will be higher at each unit store because of the pandemic, and it’s likely that the stock does no more than tread water for a few years as the fundamentals catch up to the valuation. The last time Dollar General posted a quarter of negative same store sales was their third quarter ended 2016. The yearly record of negative comps is barren. It’s a good bet the streak may be broken in 2021, but not for any real downturn. Simply, revenues were so far above normal that the 2020 comps will be extremely difficult to beat. We used the large advance to trim our holdings at incrementally higher prices and ultimately cut the position size from 4% to 1% of portfolio capital. Gains realized at progressively higher prices (and lower earnings yields) were diverted to likewise terrific companies but at lower prices and therefore increasing earning power per dollar of portfolio capital invested."

Pixabay/Public Domain Last December 2020, we published an article about the top 10 retail stocks to buy now and Dollar General is part of it. DG delivered a 19.23% return in the past 12 months.

Our calculations show that Dollar General Corporation (NYSE: DG) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds: 2020 Q4 Rankings. As of the end of the fourth quarter of 2020, Dollar General was in 57 hedge fund portfolios, compared to 56 funds in the third quarter.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best innovative stocks to buy to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.