How to Invest in Retail Stocks When Everyone’s Talking About a Recession

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Written by Kay Ng at The Motley Fool Canada

Many retail stocks do poorly when there’s higher uncertainty in the economy. For example, a number of apparel retail stocks have witnessed substantial declines in the last year. How do you invest in retail stocks when seemingly everyone’s talking about a recession?

Just like any other stock, investors can target good businesses and aim to buy the stocks low and potentially sell high. Here are a couple of Canadian retail stock examples.

Canadian Tire

Canadian Tire’s (TSX:CTC.A) umbrella of brands includes, of course, Canadian Tire, Sport Chek, Mark’s, Party City, Atmosphere, Sports Experts, etc. Because of its higher proportion of durable goods versus grocery stores like Loblaw (TSX:L), the stock tends to experience big selloffs during recessions. However, its earnings had actually been much more resilient than the stock.

For example, in the recessions triggered by the Global Financial Crisis of 2007-08 and the 2020 pandemic, the stock lost approximately 40% of its value from peak to trough. Interestingly, though, both times, its earnings didn’t fall nearly as much. In 2008 and 2009, the stock’s earnings per share only fell 10% and 11%, respectively.

Investors should also note that the stock’s valuation recovered to the much more reasonable multiple of about 13 times earnings before the end of 2009. That is, the stock price tends to move before the business results come in. In 2020, Canadian Tire’s earnings per share only fell 2%. The stock also recovered to full valuation by the end of that year.

Canadian Tire is the kind of retail stock that investors should aim to buy low and sell high. At $137.89 per share, the dividend stock trades at about 9.9 times its estimated 2023 adjusted earnings and offers a good dividend yield of 5%. The 12-month analyst consensus price target represents a discount of approximately 24%.

Its payout ratio is estimated to be about 50% of its earnings this year. So, it has wiggle room to protect its dividend. It is also a Canadian Dividend Aristocrat that appears to be committed to an increasing dividend.

XIU Total Return Level Chart
XIU Total Return Level Chart

XIU, CTC.A, and L Total Return Level data by YCharts

Loblaw

If you’re the kind of investor that prefers a buy-and-hold investing approach, you can consider a defensive retailer like Loblaw. As you can see in the graph above, Loblaw has been a more resilient stock. It has provided more persistent price appreciation, particularly in a higher inflationary environment.

Canadians need to eat, so they’re repeat customers of Loblaw’s grocery stores probably multiple times a week. Loblaw’s umbrella of brands includes Real Canadian Superstore, No Frills, Independent, Shoppers Drug Mart, etc. Even when food becomes pricier, people can’t stop eating. They might substitute for a lower-cost item but still shop for groceries.

The recent pullback of Loblaw stock to $110.96 brings it to a reasonable valuation of about 15 times its adjusted earnings. The 12-month analyst consensus price target suggests a discount of approximately 21%. The retail stock yields 1.6% with a five-year dividend-growth rate of 8.1%.

From current levels, investors with an investment horizon of three to five years has a good chance of making money from either stock. Canadian Tire appears to be cheap and offers a high yield, while Loblaw is a Steady Eddie stock at a good valuation.

The post How to Invest in Retail Stocks When Everyone’s Talking About a Recession appeared first on The Motley Fool Canada.

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Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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