The Motley Fool

Recession Preparation: 2 Defensive Stocks That Offer Huge Growth Potential

At the beginning of the month, the market was spooked into a steep one-day decline, as fears of a recession went rippling through global financial markets. As more central banks around the world ease, and the growth continues to slow in countries like China and Germany, it is likely that a recession is on the horizon.

Recessions naturally take a while to manifest, so there is no telling when it’s going to happen — only that well into the 10th year of a bull market, it’s already the longest bull market in history.

Regardless of whether you believe it’s going to happen tomorrow, or not for a couple of years, it is important to position your portfolio to be more defensive.

Since we have no idea the timing of the market, we want to pick companies who are defensive in nature but will still grow adequately as the economy expands.

Two companies that are top buys for investors looking at adding defensive positions are Metro (TSX:MRU) and Alimentation Couche-Tard (TSX:ATD.B).

Metro

Metro is a national grocery chain operating multiple brands. It’s the third-largest grocer in Canada and has followed the industry trend by buying up a large pharmacy company to offset its grocery businesses.

It bought Jean Coutu in 2018 for $4.5 billion, and so far the acquisition has paid off. The acquisition is great because it diversifies Metro’s business and gives it another avenue for growth.

In the fiscal 2019 third quarter, company-wide sales were up 12.8%, or 2.3% if you exclude Jean Coutu. Adjusted earnings were up 25.6% to more than $230 million.

In addition to the increase in sales and earnings from the Jean Coutu acquisition, the company realized more than $15 million in synergies for the quarter.

The stock is up almost 20% year to date, as investors flock into the defensive sector, and this trend will only continue.

Alimentation Couche-Tard

Alimentation Couche-Tard is in the defensive business of operating gas stations and convenience stores. It operates across Canada, in Europe and in 48 of 50 states in the U.S.

When you look at the numbers, it’s easy to see the massive scale of its business. The company has more than 16,000 stores globally. On average, it sells 43 million gallons of fuel and roughly $40 million in merchandise and service to approximately nine million customers every single day.

The makeup of the business is more in favour of convenience than fuel. 65% of transactions the company does are convenience only compared to just 25% of transactions being fuel only. This is attractive because merchandise and service revenue has a lot higher margins than fuel revenue does.

The size of Couche-Tard gives it a natural competitive advantage due to its significant scale. Lately, it’s been leveraging that scale to build its key brands such as Circle K in an attempt to strengthen its customer loyalty. This is one of the organic growth strategies it’s been working on.

This is key as the company is focused on growth and is trying to reduce the need to grow through mergers and acquisition.

Alimentation Couche-Tard is extremely well run and one of the best defensive stocks on the TSX.

Bottom line

Both companies offer investors stability and safety as their operations are defensive, and both offer investors continued paths to growth. At a time when the future of the market couldn’t be more uncertain, there aren’t many better places to put your hard-earned money.

This tiny TSX stock could be the next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...

Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!

Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. Couche-Tard is a recommendation of Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.