1 Simple Reason Why Canada’s Grocers Should Be in Your Portfolio

Why Loblaw Companies Limited (TSX:L), Empire Company Limited (TSX:EMP.A), and Metro Inc. (TSX:MRU) should be in your portfolio.

| More on:
The Motley Fool

Since the financial world looked like it was about to collapse back in 2008-2009, stock markets across the world have practically been on an uninterrupted march skyward. Sure, there have been a few stumbles thrown in there because of weakness in Europe and the Federal Reserve starting to turn off the money taps, but overall, it’s been a good five years to be an investor.

And that should scare you, at least a bit.

Nobody knows when the next correction is going to happen. It could be in September, April, or not until 2017. My crystal ball can’t predict it, and neither can anyone else’s, which is why you shouldn’t take any major action when it comes to your portfolio. We’re in this for the long haul, so we’re not concerned about short-term movements. Let the market correct, I say, and I’ll be right there loading up on cheap companies.

However, that doesn’t mean investors shouldn’t do anything. Nobody wants you to abandon your plan, but tweaking it a bit isn’t such a bad idea. Locking in profit on a volatile stock and replacing it with something conservative is just the tweak your portfolio needs.

During times of market weakness, Canada’s grocers have performed admirably. Take a look at their performance during the worst part of the financial crisis.

Source: Google Finance
Source: Google Finance

Metro, Inc. (TSX: MRU) led the way with an almost 35% return, while Empire Company Limited (TSX: EMP.A) was also up more than 7%. Loblaw Companies Limited (TSX: L) lagged the other two significantly, but still outperformed the underlying market by a fair margin. Each of these stocks also paid dividends during the period, adding to returns.

The sector has been busy with consolidation, starting with Empire acquiring all of Safeway Inc.’s Canadian stores for $4.8 billion. So far, the combined company has stumbled a bit, but shares have recovered since hitting a 52-week low in June. Its shares currently trade at $75.71, with analysts predicting that earnings will rise to $5.43 per share in 2015 and $6.44 per share in 2016. The stock trades at just 14 times 2015 earnings.

Loblaw also had a big acquisition in 2013, paying more than $12 billion for Shoppers Drug Mart after it lost out on the Safeway bidding war. Over the long term the acquisition should be a nice fit, since Loblaw is traditionally weak in the areas where Shoppers is strong — mainly in densely populated urban locations and pharmacy. Shoppers has also traditionally enjoyed higher margins than other grocers.

One thing investors overlook about Loblaw is its great financial services division. It offers full service banking in most of its superstores, along with insurance, mortgages, GICs, and the big money maker, credit cards. Canadians owe more than $2.5 billion on their PC Mastercards, and the company gains brand awareness every time a shopper swipes one of its cards.

Even though Metro didn’t get in on the acquisition party, it’s still an attractive stock during market downturns. It trades at just 15 times earnings, pays a 1.7% dividend that was just increased by 20%, and has a more conservative balance sheet than its competitors. The company has a large presence in Quebec and Ontario, and could start to move west.

Canada’s grocers are a nice place to hide during market downturns. Consider them for your portfolio, especially as markets continue to make record highs. It’s a good time to be a little conservative.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Investing

money cash dividends
Dividend Stocks

The 2 Stocks Every Dividend Investor Should Own for Reliable Cash

Dividend stocks offering consistent and reliable returns can be a crucial asset in any portfolio, especially for income-producing dividend portfolios.

Read more »

grow dividends
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These top TSX dividend-growth stocks now offer yields above 7%.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold for Tax-Free Gains

Building a large, tax-free nest egg in your TFSA with growth stocks can give you more control over your tax…

Read more »

Group of people network together with connected devices
Tech Stocks

This Is the Best Overlooked AI Stock on the TSX Today

This AI stock has been a top growing in the last while, but remains overlooked despite its strong portfolio and…

Read more »

Women's fashion boutique Aritzia is a top stock to buy in September 2022.
Dividend Stocks

May Boycotts: Is Loblaw Stock in Trouble?

Even extreme fluctuations in consumer purchasing patterns may not impact a stock as aggressively as demoralizing actions like boycotts.

Read more »

Dice engraved with the words buy and sell
Stocks for Beginners

TD Stock: Buy, Sell, or Hold?

TD stock (TSX:TD) is under immense scrutiny during its money laundering probe, but this could also mean it is a…

Read more »

Different industries to invest in
Tech Stocks

Why This AI Stock Surged 363% in Just 1 Year

This AI stock has surged this year by almost 400%! And yet this could only be the beginning for this…

Read more »

Online shopping
Tech Stocks

2 Growth Stocks Bay Street Might Be Sleeping On, but I’m Not

I'm not sleeping on Taiwan Semiconductor (NYSE:TSM) stock. Shopify (TSX:SHOP) is a Canadian stock with similar growth rates.

Read more »