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Do These 4 Beaten Up Retailers Belong In Your Portfolio?

Thanks to pressure from Walmart and Target expanding into the Canadian market, the record debt levels of the Canadian consumer, and high real estate prices eating at the average Canadian homeowner, Canadian retail sales numbers have been somewhat anemic over the last little while. There’s a lot of competition in the Canadian market, and unfortunately not much growth. This translates into some lackluster results in the sector.

But for patient investors, this could represent an attractive entry point. Sure, each of these companies are facing some serious headwinds, but all are aggressively making moves that should position them as stronger long-term investments. Here are four that warrant consideration for your portfolio.

Liquor Stores N.A.

Shares in Liquor Stores N.A. (TSX: LIQ) have performed poorly over the past year, falling about 40% from previous highs. Weak results from Alberta, the company’s main market, weighed on the stock, as well as the government in B.C. announcing it would allow alcohol to be sold in grocery stores at some point in the future.

Still, shares in Canada’s largest publicly traded liquor store do have upside potential. Most Canadian provinces are feeling pressure to end liquor monopolies, opening up new potential markets across the country. Most of the company’s sales come from Alberta, home of the best economic numbers in Canada.

While waiting for a recovery, investors are treated to a 9% dividend, which was covered by operating cash flow in 2013. The balance sheet is improving as well, as the company is focusing on paying down its debt. Analysts expect earnings to rebound to $0.86 per share in 2014, putting the stock at a reasonable 13.7 times forward earnings.

Empire Company

Generally, when investors get a chance to buy one of Canada’s top grocers at a 52-week low, the investment ends up being a good one.

Empire Company (TSX: EMP.A), the parent of both Sobeys and Safeway Canada, is Canada’s second largest grocer. The company recently came out with its first quarterly earnings report as a combined company, and while revenue was decent, the bottom line disappointed investors.

Look for Empire to come roaring back once the Safeway acquisition starts paying off. Analysts still estimate that revenue will grow almost 40% this year thanks to welcoming Safeway into the fold, but that earnings will actually fall to $4.56 per share. That still puts Empire at a reasonable 14 times earnings going forward, much cheaper than Loblaws’ (TSX: L) 17 times. And that’s even without an earnings surprise, which could very well happen.

Rona

Another poorly performing Canadian retail stock is home improvement retailer Rona (TSX: RON), selling off partially because of weakness in its major market, Quebec, and because of fears of a Canadian real estate slowdown.

Because of that, the company is a pretty good value right now. It trades at less than book value, is expected to swing back to a profit in 2014 after finishing last year in the red, and it continues to close underperforming stores. If a slowdown does happen in Canadian real estate, Rona has taken steps already to weather the storm.

Investors might be interested in Rona’s preferred shares, which currently yield more than 6.4%. They offer a bit more security than the common stock.

Radio Shack

And finally, we have the wild card of the group, Radio Shack (NYSE: RSH). Shares in the beleaguered electronics retailer have been hammered, falling more than 95% in the last decade.

There is a legitimate chance the company could go bankrupt. Sales continue to slide, losses are accelerating, and the balance sheet looks weaker every quarter. This is not an investment for the faint of heart.

Still, the company is making some positive moves. It continues to close down underperforming stores and cut costs. It also has a good brand, at least among people old enough to remember the company’s heyday. While it’s not a stock I’d consider because of the risk, if the company can manage to turn things around it’ll be a huge win for investors. That’s a big if; the company’s problems are daunting.

Foolish bottom line

While the rise of internet retailers like Amazon has challenged the traditional model, people are still going to go to stores. Investors are wise to consider retailers trading at depressed levels, since they’re likely to do well once numbers start ticking back up again. There’s certainly some value in retailers.

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Fool contributor Nelson Smith has no position in any stock mentioned in this article. David Gardner owns shares of Amazon.com. The Motley Fool owns shares of Amazon.com.

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