Dollar General Corporation (NYSE:DG) shares are up more than 22.01% this year and recently increased 0.68% or $0.61 to settle at $90.98. Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI), on the other hand, is up 78.21% year to date as of 12/05/2017. It currently trades at $50.60 and has returned 7.64% during the past week.

Dollar General Corporation (NYSE:DG) and Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) are the two most active stocks in the Discount, Variety Stores industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

**Growth**

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect DG to grow earnings at a 7.50% annual rate over the next 5 years. Comparatively, OLLI is expected to grow at a 19.33% annual rate. All else equal, OLLI’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 10.02% for Ollie’s Bargain Outlet Holdings, Inc. (OLLI). DG’s ROI is 15.70% while OLLI has a ROI of 7.80%. The interpretation is that DG’s business generates a higher return on investment than OLLI’s.

**Cash Flow **

The amount of free cash flow available to investors is ultimately what determines the value of a stock. DG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, OLLI’s free cash flow per share was -0.16. On a percent-of-sales basis, DG’s free cash flow was 0.15% while OLLI converted -0% of its revenues into cash flow. This means that, for a given level of sales, DG is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. DG has a current ratio of 1.40 compared to 2.80 for OLLI. This means that OLLI can more easily cover its most immediate liabilities over the next twelve months. DG’s debt-to-equity ratio is 0.54 versus a D/E of 0.18 for OLLI. DG is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

DG trades at a forward P/E of 18.16, a P/B of 4.35, and a P/S of 1.09, compared to a forward P/E of 35.81, a P/B of 4.45, and a P/S of 3.21 for OLLI. DG is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

**Analyst Price Targets and Opinions**

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. DG is currently priced at a 7.53% to its one-year price target of 84.61. Comparatively, OLLI is 7.87% relative to its price target of 46.91. This suggests that DG is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for DG and 2.30 for OLLI, which implies that analysts are more bullish on the outlook for DG.

**Insider Activity and Investor Sentiment**

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. DG has a short ratio of 4.36 compared to a short interest of 10.27 for OLLI. This implies that the market is currently less bearish on the outlook for DG.

**Summary**

Dollar General Corporation (NYSE:DG) beats Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) on a total of 9 of the 14 factors compared between the two stocks. DG is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, DG is the cheaper of the two stocks on an earnings, book value and sales basis, DG is more undervalued relative to its price target. Finally, DG has better sentiment signals based on short interest.