Should Canadian Investors Avoid Consumer Cyclical Stocks in 2019?

Do stocks like AutoCanada Inc. (TSX:ACQ) belong in a long-term portfolio, or is it time to replace them?

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With retail facing a potentially tough year, and having suffered a challenging holiday period, does it make sense to buy and hold retail and other consumer cyclical stocks through 2019? From auto stocks to multi-line retailers, let’s take a deep dive into some of the available data and see whether there are any strong buys or obvious traps on the TSX index in this financial landscape.

AutoCanada (TSX:ACQ)

Trading at a discount of 22% off the future cash flow value, this franchised automobile company with dealerships across Canada is one of the most recognisable auto stocks on the TSX index. Up 7.81% in the last five days, investors are finding something to like about AutoCanada.

A stock that began a prolonged descent last April, eventually shedding half its value (the trend has been hovering around the $12 zone for six months now), AutoCanada earnings growth rate fell by 165.8% in the last 12 months, compounding an overall negative five-year average of -22.7%.

Uni-Select (TSX:UNS)

Down 30.83% in the last five days, another TSX index auto-related stock is looking like a potential value buy. Indeed, with a P/E of 11.7 times earnings and P/B of 0.8 times book, Uni-Select is generally sound, though its expected 4.2% annual growth in earnings is lower than AutoCanada’s.

Uni-Select’s one-year past earnings growth rate dropped by 18.2%, though it grew by about the same amount over the last five years. Meanwhile, a dividend yield of 2.77% is on offer to investors bullish on the auto trade.

Hudson’s Bay (TSX:HBC)

Moving over to one of the top TSX index multi-line retail stocks, Hudson’s Bay’s negative one- and five-year past earnings growth rates compounded with an expected drop of 6.3% in annual earnings make for a red flag.

However, we’re about to take a look at another North American retail stock that casts Hudson’s Bay stats in a good light. Additionally, trading at a discount of 19% compared to the future cash flow value, Hudson’s Bay is good value, confirmed by a P/B of 1.1 times book. It pays a small dividend yield of 0.62% to mid-to-long-term capital gains investors willing to sweat it out.

Home Depot (NYSE:HD)

With a heady brew of high-powered stats not often seen on the TSX index, NYSE-listed Home Depot is a potentially risky investment. Before investors get overly excited about an high return on equity last year, a high debt level remains a concern; meanwhile, it’s down 2.1% in the last five days, and Home Depot insiders have only sold shares in the last three months.

While a one-year past earnings growth of 22.8% represents an improvement on a five-year average of 12.5%, Home Depot is overvalued with a P/E of 20.5 times earnings and high P/B of 161.3 times book, leaving a so-so dividend yield of 2.19% and low 5.2% expected annual growth in earnings.

The bottom line

Investors need to weigh risk with income when buying cyclical stocks in this economic climate. There are a few things going for AutoCanada that make for an intriguing buy, however: A P/B ratio of 0.8 times book signifies decent value, while a dividend yield of 3.08% is matched with a significant 110.5% expected annual growth in earnings. Meanwhile, before Hudson’s Bay fence-sitters give up on the retail ticker, context provided by the likes of Home Depot should be taken into consideration.

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 Victoria Hetherington has no position in any of the stocks mentioned.

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