The broader markets are in the midst of a correction. Investors are worried over the impact of the dreaded coronavirus, which has now spread to over 50 countries and claimed at least 3,000 lives. The Dow Jones is trading 10% below its record highs and the iShares S&P/TSX Index ETF has also slumped 9% since February 19, 2020.
However, while consumer demand will remain tepid, especially in China and other countries that are majorly impacted by the virus, this sell-off provides investors an opportunity to buy stocks at an attractive valuation. Investors need to consider defensive stocks for their portfolio in a market that is expected to be volatile in the short term.
One such company is Dollarama (TSX:DOL).
Dollarama is trading 25% below 52-week highs
Shares of Canada’s leading retailer Dollarama are trading at $39.34. The stock has lost a quarter of its market cap since August 2019. It has returned 7% in the last 12 months compared to the S&P 500 returns of 10.7%.
Investors can look to take advantage of this pullback, as the company fundamentals remain strong. Analysts expect Dollarama to increase sales by 6.7% to $3.79 billion in 2020 and 6.9% to $4.05 billion in 2021.
Consensus estimates have pegged the company’s earnings growth at 13.6% in 2020 and 11.4% in 2021. Comparatively, Dollarama stock is trading at a forward price-to-earnings multiple of 22, which can be considered reasonable looking at its growth metrics.
A top defensive pick
Dollarama is one of the best stocks to hold in case the recession hits Canadian markets in 2020. During job losses, consumers would want to cut spending and purchase products from thrift stores such as Dollarama. These stores offer products at cheaper rates, which drives consumer footfall higher in an economic downturn. This was one of the reasons why shares of Dollar Tree more than doubled during the financial crisis last decade.
Dollarama has created massive wealth for investors
Despite the recent weakness in Dollarama stock, the company has been a solid bet for long-term investors. The company went public back in 2009, and a $1,000 investment in the stock would now be worth over $12,000.
This Canada-based holding company has 1,200 stores in the country with an average area of 10,275 square feet. It is now targeting international expansion with the acquisition of Dollarcity in 2019.
Dollarama acquired Dollarcity for $122 million and has a 50.1% stake in the latter. Dollarcity has a huge presence in the emerging markets of Latin America with 104 locations in Columbia, 58 in Guatemala, and 48 in El Salvador.
Columbia is one of the fastest-growing economies in the region, and Dollarama is set to benefit from a higher purchasing power of consumers in these markets coupled with a rapidly expanding population and growing middle class.
The cherry on the cake for investors is Dollarama’s dividend yield of 0.5%. While this is less than impressive, Dollarama can easily double or triple dividend payments given its payout ratio of 9.8%.
Analysts tracking Dollarama have an average 12-month target price of $48 on the stock, which is 22% above the current trading price.
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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 Aditya Raghunath has no position in any of the stocks mentioned.