Sell these 3 Companies Before a Drop

Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the North American economy recovers, companies such as Dollarama (NASDAQOTH: DLMAF), Wal-Mart (NYSE: WMT), and Target (NYSE: TGT) will likely have a hard time raking in the profits to which they were accustomed during the recession.

Dollarama earnings fall

On June 12 Dollarama reported its fiscal first quarter earnings, which were off of analyst predictions for the first time since the firm's IPO in October 2009. The median estimate was for the company to come out with earnings per share of CAD $0.67, but the company reported CAD $0.62. In the 14 previous quarters, the Canadian company beat analyst expectations.

According to Edward Jones & Co. analyst Bobby Hagedorn, increased expenses were the main reason for the sour performance. "It was a disappointing quarter. The biggest surprise for us was the operating costs, which were way higher than what we expected," he told Bloomberg. "They attributed it to costs from the increased pace of store openings."

The previous steady growth for the company was a sign of the times, with profits soaring as a new class that was hard-hit by the recession poured into stores looking for deals. But now that those people are in more solid financial positions, Dollarama isn't likely to see the type of profits it had in recent years. The company opened 21 stores in the first quarter, and 85 stores in the last year. These outlets cost a lot of money to set up and train staff, so expect Dollarama's earnings to be down for at least the next three quarters, despite what may happen in the economy.

Wal-Mart shares are limping

After reaching nearly $80 per share early in mid-May, Wal-Mart has stumbled to its current level of around $75 per share following a dim earnings report. Sales increased by just 1% in the fiscal 2014 first quarter earnings released in May. While management at the firm cited a delay in payroll tax and one less selling day than the same period last year as the catalysts for the poor performance, those could be scapegoats for the real reason: people aren't bargain shopping as much. However, the report could be a one-off, as the firm is getting a hold on the grocery business and could drive up sales in that area in the months ahead.

Target is not a buy in this market

Similar to Dollarama and Wal-Mart, Target has its work cut out for it in order to keep profits flowing. The company has positioned itself nicely with investors and is now making a move into the Canadian market. I see earnings falling more in line with what they were prior to the recession, as the economy essentially looks positioned to regain its pre-recession status within the next few years. This is evidenced in increased activity and rising prices in the housing sector, and well as improvements in jobs creations. While I would hold off buying Target until the stock drops in price to near its pre-recession level (which may happen in light of a recovery), the company's expansion efforts into Canada, coupled with it being a relatively recession-proof firm, would likely improve your portfolio if the stock is bought at the right price.

Getting out now

All three companies haven't recently experienced the types of gains they accrued in the years following the recession, but their share prices haven't fallen substantially. It's best to get out now. On the one hand, you have positive economic indicators and, on the other, you have falling profits at bargain stores. It is only logical to assume that the overall trend is leaning towards an economy similar to the one prior to the recession -- one where fewer people shopped at bargain stores.

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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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