Should Dollar General or Dollar Tree Give Investors a Case of FOMO? Shares of Dollar General and Dollar Tree are rallying the day after both companies reported strong earnings. In this article, we'll look at each stock and let you know if...

Dollar stores are on fire, but does the post-earnings rally have legs?

Shares of Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR) are rallying the day after both companies reported strong earnings. In late-day trading, DLTR stock was leading the NASDAQ index with a 21% gain. For its own part, Dollar General posted a gain of over 13%.

In fairness, both stocks plummeted last week in what could be described as guilt by association. The dour outlooks from Target (NYSE: TGT) and Walmart (NYSE: WMT) stoked investor fear.

But is this rally a sign that retail is recovering, a dead cat bounce...or is it something else? In late May, U.S. Treasury Secretary Janet Yellen started uttering the "S" word. That word is stagflation. However, with or without stagflation, many stock analysts are concerned about the possibility of a recession. And let's be clear, even if neither of these worst-case scenarios comes to pass, it will take a long time before the economy is firing on all cylinders.

The Consumer is Under Pressure

So far, consumer spending is remaining surprisingly resilient. But that's a lagging indicator. By that, we mean that the data comes out after the money has already been spent. Consumer sentiment on the other hand is falling. And that's a leading indicator. That sentiment leads us to believe that consumers are looking to stretch their dollars further.

And in those scenarios, they turn to dollar stores. That thesis is fueling excitement for Dollar General and Dollar Tree stocks. In this article, we'll look at each stock and let you know if either, or both, are worth buying after this rally.

Dollar Tree is Upping Its Guidance

Dollar Tree's revenue came in 2% above analysts' expectations. But what excited investors is the company beating earnings expectations by 18%. Furthermore, the company raised its earnings outlook for the year citing its pricing power. The company has managed to increase prices by about 25% so far this year. That's significant because the company's Dollar Tree stores now have prices of $1.25 as opposed to $1.

However, Dollar Tree is also the parent company of Family Dollar. And the company continues to open its combination stores which bring the everyday low prices of Dollar Tree into a Family Dollar footprint. Plus, the company is expanding the store-in-store concept with the Dollar Tree Plus stores inside Dollar Tree stores. This is where the company has merchandise that it sells for anywhere from $3 to $5.

Dollar General Continues to Show Why Location Matters

The bullish narrative for Dollar General is that it is continuing to aggressively expand its store count. But the company is being strategic about it. The company focuses on serving rural areas or small towns where they are away from mass merchandisers like Walmart or Target. I've remarked in the past that in my small town, I have three DG locations within about five miles of where I live.

With customers being concerned about not just the budget for food and household items but also with their gas budgets, this should be a winning strategy as consumers will be able to get a good value while being able to make a tank of gas last longer.

And the Winner Is...?

At one time or another, I've given each stock a nod over the other. And as long-term investments, both stocks deserve a place in your portfolio. However, in this exact moment, I'm more inclined to buy Dollar General stock.

My reasoning is simple. It offers a dividend that Dollar Tree does not. Don't get me wrong, there are much better dividend stocks than Dollar General. However, the dividend does offer some protection in case the market is doing a head fake. I've been doing some nibbling in the market, but one rule I have right now is that any new position I take has to be a stock that offers a dividend. I'm not choosing Dollar General at this time, but it's on my watch list and perhaps it should be on yours.