1 Stock To Buy, 1 To Dump When Markets Open: Dollar General, MicroStrategy

  • Stock Market Analysis
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Stocks on Wall Street ended modestly higher on Friday, but the major averages— S&P 500 , Dow , and NASDAQ —still suffered their worst weekly loss since 2020 as investors grew increasingly worried about a potential economic slowdown.

Markets fear that the Federal Reserve will have to be much more aggressive in its efforts to tame inflation , raising the risks of a recession.

S&P 500, NASDAQ, And Dow Chart

The holiday-shortened week ahead will feature key Congressional testimony from Fed Chair Jerome Powell as investors look for more clues on the size and pace of additional rate hikes .

U.S. stock markets will be closed on Monday in observance of Juneteenth National Independence Day.

The four-day week ahead will also include important economic data, such as the latest U.S. consumer sentiment report due on Friday.

Meanwhile, on the earnings docket, there are just a handful of corporate results due, including FedEx (NYSE: FDX ), Rite Aid (NYSE: RAD ), KB Home (NYSE: KBH ), Lennar (NYSE: LEN ), and Darden Restaurants (NYSE: DRI ).

Regardless of which direction the market goes, below we highlight one stock likely to be in demand and another which could see further downside.

Remember though, our timeframe is just for the upcoming week.

Stock To Buy: Dollar General

As fears mount that the U.S. economy will hit a rough patch soon, Dollar General (NYSE: DG ), which operates more than 18,000 stores in 44 states, is a solid choice for investors looking to hedge in the face of further market volatility in the days ahead.

The largest discount retailer in the U.S., which describes its core customers as households earning less than $35,000, mostly sells groceries, household supplies, and personal care products at rock-bottom prices.

The company earns its recession-proof status as low-income families and cash-strapped consumers looking for thriftier-priced alternatives during tough economic times shop more at dollar stores.

DG Daily Chart

Shares of DG ended at $230.80 on Friday, within sight of their recent all-time high of $262.20 touched on Apr. 21. At current levels, the Goodlettsville, Tennessee-based discount retailer has a market cap of $52.4 billion.

Dollar General shares have held up better than some of its larger rivals in the battered retail sector, falling just 2.1% year-to-date to easily outperform industry bellwethers Walmart (NYSE: WMT ), Costco (NASDAQ: COST ), and Target (NYSE: TGT ).

In a sign of how well its business has performed amid the current macro backdrop of slowing growth and accelerating inflation, Dollar General reported first quarter profit and sales which easily topped expectations on May 26.

The earnings beat was driven by booming demand from customers stocking up on groceries and household essentials as Americans cut back spending on discretionary items and divert more spending into basic needs and services.

The discount chain also provided an upbeat outlook, lifting its full-year guidance for revenue and same-store sales growth, as bargain-hunting Americans are increasingly shopping at discounters.

Stock To Dump: MicroStrategy

Shares of MicroStrategy (NASDAQ: MSTR )—the enterprise software company which is the biggest corporate investor in Bitcoin in the world and has increasingly become a proxy for investing in Bitcoin —are anticipated to suffer another challenging week as investors react to the ongoing turmoil in the cryptocurrency market.

The price of Bitcoin dropped sharply overnight Saturday, briefly falling below $18,000 to reach its lowest level since November 2020. It staged a mild recovery in Sunday action, hovering around the $19,500 mark.

The virtual currency’s relentless selloff has seen it lose more than half of its value since the start of 2022, down 60% year-to-date and approximately 75% below its all-time high of $68,925.

BTC/USD Daily Chart

Taking that into account, MicroStrategy stock, which has already declined by 37% in June, could sink further in the days ahead as it faces a possible “margin call” against a Bitcoin-backed loan that investors fear could force the company to liquidate some of its BTC holdings.

The business intelligence and software services provider borrowed $205 million from crypto bank Silvergate Capital (NYSE: SI ) in March to buy more Bitcoin, with the three-year loan mostly secured against 19,466 Bitcoins of the company’s own holdings.

MicroStrategy’s president and chief financial officer, Phong Le, previously highlighted in May that if the price of Bitcoin falls below $21,000, it would trigger a margin call.

Usually, a margin call is met by either providing additional capital or liquidating the loan's collateral.

MSTR Daily Chart

MSTR stock fell to its lowest level since August 2020 at $134.09 on May 12; it closed Friday’s session at $167.60.

Year-to-date, shares of the Tysons Corner, Virginia-based software company are down 69.2% and are almost 88% away from their record peak of $1,315.00 reached in February 2021.

The Michael Saylor-led company held 129,218 Bitcoins as of Mar. 31, acquired at an average purchase price of $30,700 per BTC, according to a company filing.

At current prices, MicroStrategy, which spent $4 billion on its Bitcoin investment, is down more than $1 billion, with its total BTC holdings last valued at $2.9 billion.

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