Much has been made about the fact that October is not a good month for stocks, and there seems to be a move towards risk aversion as investors’ spirits match the gloomy and grey fall weather. There is the recent prospect of U.S. tariffs on European goods and continuing trade tension with China.
Even if global reserve banks lower interest rates to prevent a global slowdown, extreme nervousness has suddenly crept into the market. In that sort of situation, investors tend to hunker down and focus on recession-resilient stocks with wide moats and lots of cash to withstand volatility.
However, I am going to go slightly off the beaten path and describe why Canadian Tire (TSX:CTC.A) deserves a good look for your long-term investment portfolio, especially in turbulent times.
My thesis may seem counter-intuitive, since consumer stocks get hit first any time the economy looks shaky. However, Canadian Tire has two massive weapons at its disposal to thrive in any economic environment.
Party City acquisition gives credibility to “fun store” branding
A lot of investors raised eyebrows at Canadian Tire’s summer acquisition of Party City. There were questions about helium shortages that would adversely impact Party City’s balloon business — the major money maker.
However, it is a wildly shrewd investment, because Canadian Tire has made a big push to brand itself as Canada’s fun store, and this acquisition fits perfectly into that theme. Canadian Tire has rightly figured out that fun is priceless, fun happens regardless of economic climates, and in an ever-busy world, people will make time for it and spend on it.
Canadian Tire already has a deep emotional attachment with the Canadian consumer, but now it will surely deepen as Canada increasingly associates Canadian Tire with fun times.
The psychological component of this acquisition cannot be underestimated, because what Canadian Tire has gained in addition to an immediately accretive business is a platform that focuses on micro-seasons and micro-celebrations.
A good example of a micro-season is the extremely fervent St. Patrick’s Day celebrations all over Canada. People may not immediately associate Canadian Tire with these events, but they are about to. I am convinced we will see more green balloons at St. Paddy’s day parades going forward.
But let’s not get lost in the fun because this acquisition is a financial “puck in the net” as well. Party City goods sell at a higher margin than the average Canadian Tire product, so the combined product mix now has a higher margin, which should translate to better earnings.
In addition, Canadian Tire is forecasting a doubling of Party City’s revenue from $140 million to $280 million by 2021, because its products now have access to the monster +500 Canadian Tire store footprint.
Triangle rewards program gives unparalleled access to consumer sentiment
Most investors look at Canadian Tire as a consumer retail business, but the reality is that it is also a data business: consumer data and lots of it. Canadian Tire recently evolved its loyalty program, Canadian Tire Money, with the introduction of Triangle Rewards in 2018.
Triangle Rewards has 12 million members, which basically means almost one in three Canadians is a member. What is more interesting is that this rewards program is now linked to the 2.1 million Canadian Tire-branded credit cardholders, which means there is a treasure trove of data that Canadian Tire is mining around consumer sentiment, tastes, habits, and preferences.
This data capability cannot be underestimated, because it allows Canadian Tire to stock its shelves with the right products at the right times of the year and optimize its supply chain accordingly. Optimization of the supply chain means lower expenses, lower inventory costs, and greater earnings power.
The final verdict
Canadian Tire’s stock price at the time of writing is hovering in the narrow range of $140-$145. At a P/E ratio of 13, the stock is not cheap at the moment. It has traded hands as low as $135 in early September. My sense is that there will be short-term macroeconomic turbulence and some volatility brought about by the upcoming elections.
Given that backdrop, my view is that a more attractive entry point into the stock would be around $130. So, value investors should keep a very close watch on this stock in the next few weeks, as that opportunity to scoop up shares at a fantastic price may be coming very soon.