The periodic review of the performance of our stock holdings as well as the performance of those stocks that are on our watch lists is an important exercise. This review should happen at least once a year, but also when big stock price movements are noticed. Let’s do this here.
While a 3.3% Increase isn’t that much, after a difficult second half of 2019, Loblaw Companies Ltd. (TSX: L) stock price performance in January is primarily reflective of some key strengths that Loblaw stock offers to investors.
Loblaw stock is a defensive dividend holding
While the Loblaw dividend yield pales in comparison to some other dividend yields out there, Loblaw stock is as core a defensive holding as we can get. Offering consumer staples goods and pharmaceutical products, Loblaw is extremely insensitive to any economic troubles that may be coming our way.
In January, the market was spooked by the coronavirus global health scare. Whenever we have scares of any kind, defensive stocks should outperform, as Loblaw stock did in January.
Going forward, many risks remain to the global economy and the S&P/TSX Composite Index, such as valuation levels and elevated consumer, company and country debt levels.
I view Loblaw as a solid defensive holding for its leading market position, its strong annual free cash flows, and its reliable and growing dividend.
The operating environment continues to benefit Loblaw stock
The industry continues to witness a healthy operating environment, as food price inflation continues to be strong. In December, Loblaw benefited from a 3.2% price inflation on food.
In addition to positive pricing trends, Loblaw continues to roll out its e-commerce strategy at a time when the competitive environment may be peaking and settling down.
Walmart Canada’s supercentre rollout is almost complete, and the company’s new online marketplace expands the company’s offering beyond its core products while enhancing convenience for the shopper.
Finally, we must mention the company’s entrance into the medical cannabis arena through its Shoppers Drug Mart stores. The pharmacy chain is licensed by Health Canada and has signed supply deals with a variety of medical cannabis producers.
As of December 2019, Shoppers can distribute medical cannabis products direct to medical patients nationwide.
Further to this, Loblaw has reportedly been attempting to enter the recreational cannabis space since 2018, and given the fact that Shoppers Drug Mart is already involved in the medical cannabis industry, it appears that the company can leverage this to maximize their success in the recreational cannabis industry.
Foolish bottom line
Loblaw’s stock price performance in January, beating the performance of the broader market, which is telling for investors. 2020 will be a year that will see the more defensive stocks outperforming, as stocks that are more cyclical underperform.
In closing, I would like to remind foolish investors of our belief in holding great businesses for the long term. While this belief remains intact, we are also aware that sometimes, short-term stock price movements create opportunities to create wealth.
Blending this long-term focus with a keen eye for short-term stock mispricings, we can use both strategies in harmony, and our quest for financial freedom can be fulfilled.
