The Loblaw (TSX:L) stock price significantly outperformed in March. In a month overtaken with fear, uncertainty, and dread, Loblaw stock was a shining outlier. The fact that Loblaw’s stock price outperformed in this environment is not a surprise, though. This is a defensive stock that can be expected to outperform in today’s environment. Let’s take a closer look.
Loblaw’s stock price rose because this is an essential business
A countless number of stores are closed for the foreseeable future. At this time, only essential businesses get to keep going. Loblaw is one such business. As Canada’s largest food retailer and leading pharmacy outlet, Loblaw is in the sweet spot today.
Loblaw stores are seeing a big boost in demand from shoppers stocking up on many items. In other words, they are seeing a continuity of demand, as we would expect from a consumer staples retailer. On the flip side, Loblaw has increased wages for its employees.
It is a business that is functioning with a few adjustments. At the end of the day, the net effect of this should be positive. It is a business that is running. This has become a rare sight in today’s environment.
Loblaw’s stock price rose because investors want defensive stocks
Loblaw stock is defensive. This is because it is a consumer staples stock. This was true even before the coronavirus crisis hit. From Loblaw’s exposure to the food sector to its exposure to the healthcare business, Loblaw provides us with the necessities of life. So, it follows that Loblaw stock is a defensive stock. The stock will ride out the storms of uncertainty and economic hardship.
Loblaw’s stock price rose because of the company’s solid financials
Loblaw will be releasing its first-quarter results on April 29. While the results will certainly be impacted by the coronavirus disruption, the impact will be relatively benign when compared to most other companies. It might even be positive.
Before the coronavirus crisis hit, Loblaw stock was already performing well. In the latest quarter, the company generated strong free cash flow and continued to leverage its scale. The company used a significant portion of free cash flow to buy back 13.6 million shares, thus returning cash to shareholders.
Going forward, we can expect free cash flow in excess of $1 billion annually. The company’s predictable and defensive business will continue to provide consumers with essential everyday products.
Foolish bottom line
In a month that will go down in history, we are seeing standouts. This can guide us to the stocks that will provide us with much-needed returns in 2020 and beyond. Most stocks have been hit in these difficult times. The details don’t seem to matter that much. But not all stocks are equal.
Loblaw’s stock price was a clear standout, clearly outperforming the market in March. Indeed, the stock even did well on an absolute basis. A 9% return in one month is a good month regardless. In 2020, it is stocks like Loblaw stock that should continue to provide investors with respectable returns.
