In the category of profitability DG performs with its peers with respect to gross margins, but outperforms in the category of operating margins; here DG is better than 83% of its peers. This relates to the ability of DG to control its expenses. On a related note, management effectiveness with respect to ROE (return on equity) is also impressive. DG is able to reinvest its earnings very efficiently. DG has a higher ROE than 82% of its peer group. This makes DG more attractive to investors when compared to its peers. Management is a key variable for DG, especially given the fact that the company has chosen to increase its long-term debt by 11% since Q3 2012.

Another metric to look at is DG’s PEG ratio. A PEG ratio puts forward EPS and growth into prospective. PEG ratios under one are generally accepted to be attractive and the opposite for over  one. This ratio is highly a function of and dependent on forward estimates, which can be a weakness, but is still an interesting metric. Wall Street is expecting EPS to grow at 18.5%. Taking DG’s forward PE of 14.8x and dividing it by 18.5 (which represents 18.5% EPS growth) yields a PEG ratio of 0.8x. This means that forward earnings may be ‘cheap’ with respect to growth expectations. It is also interesting to note that the average PEG ratio in DG’s peer group is 1.14.

—
salerno.mark.a@gmail.com

Paper bought 1500 IBB March 150 Puts for $.60 (4.4 times usual volume) when stock was trading $152.96
Paper bought 1200 NBG May 1 Puts for $.15 (4.0 times usual volume) when stock was trading $1.17
Paper bought 1694 CAH April 45 Puts for $.69 (6.0 times usual volume) when stock was trading $46.43
Paper bought 1300 MAR July 38 Puts for $1.70 (2.3 times usual volume) when stock was trading $39.50
Paper bought 900 NIHD April 5 Puts for $.50 (2.3 times usual volume) when stock was trading $5.06

Paper bought 1600 RSG April 30 Calls for $1.775 (4.3 times usual volume) when stock was trading $31.42
Paper bought 39,291 AMTD Aug 23 Calls for $.35 (11.9 times usual volume) when stock was trading $19.72
Paper bought 5000 ETN April 65 Calls for $.90 (2.4 times usual volume) when stock was trading $62.57
Paper bought 1300 HK Jan 2014 10 Calls for $.45 when stock was trading $6.42
Paper bought 550 NM June 5 Calls for $.15 (39.1 times usual volume) when stock was trading $3.93

Paper bought 39,291 AMTD Aug 23 Calls for $.35 (11.9 times usual volume) when stock was trading $19.72
Paper bought 13,326 JCP April 17 Calls and Sold April 12 Puts for $.38 (2.6 times usual volume) when stock was trading $15.18
Paper sold 6009 MTG March 5 Puts for $.38 (5.0 times usual volume) when stock was trading $5.14
Paper sold 2000 RDN Jan 2014 10 Puts for $1.81 (2.8 times usual volume) when stock was trading $10.49
Paper sold 4240 PPL April 30 Straddles fir $2.50 (12.4 times usual volume) when stock was trading $31.25

The chart below displays the price of long HLF and short JCP…the opposite of Mr. Ackman. Over the last few trading days, the price of the pair has nearly doubled, meaning pain for Mr. Ackman, but the billionaire is probably not very concerned with day-to-day fluctuation, for according to his analysis, there are structural and fundamental drivers behind the trade…high conviction.

Some folks, like Carl Icahn, smell the potential for a short squeeze in HLF. Mr. Icahn, who goes way back with Mr. Ackman, has taken the other side of the HLF trade. Additionally, JCP may be a way to watch HLF too, for the two have seemed to have an inverse relationship. Either way, this Wall Street drama is far from over.

HLF-JCP Displayed below.

salerno.mark.a@gmail.com

Paper bought 900 LOPE April 20 Puts for $.35 (3.7 times usual volume)
when stock was trading $23.70
Paper bought 223 MCK May 97.5 Puts for $1.05 (3.7 times usual volume)
when stock was trading $107.13
Paper bought 507 TFM March 40 Puts for $.55 (10.5 times usual volume)
when stock was trading $44.86
Paper bought 465 ADTN March 22 Puts for $1.30 (3.0 times usual volume)
when stock was trading $21.03
Paper bought 700 CQB Aug 3 Puts for $.15 (7.3 times usual volume) when
stock was trading $5.97

Paper bought 3000 CMCSK April 40 Calls for $.40 (2.9 times usual
volume) when stock was trading $38.39
Paper bought 1000 AMCX June 65 Calls for $1.20 (9.9 times usual
volume) when stock was trading $57.26
Paper bought 900 DOX July 37.5 Calls for $.80 (3.8 times usual volume)
when stock was trading $36.33
Paper bought 900 HOGS June 12.5 Calls for $.74 (2.4 times usual
volume) when stock was trading $12.76
Paper bought 2762 TROX April 22.5 Calls for $.50 (4.9 times usual
volume) when stock was trading $20.36