Are Grocery Stocks a Buy?

Grocery stocks like Loblaw Compaies Ltd. (TSX:L) and Metro Inc. (TSX:MRU) are both seeing stock prices soar in today’s downturn, but can the prices hold up?

| More on:
Supermarket aisle with empty green shopping cart

Image source: Getty Images

While the stock market might be down, there is one area right now that still manages to hold high: grocery stocks. The entire world has been looking to grocery companies to be on top of bulk ordering, and most have met the challenge.

However, that also means that while there are a lot of opportunities in today’s market, it’s unclear whether grocery stocks are one of them.

That’s because stocks like Loblaw Companies Ltd. (TSX:L) and Metro Inc. (TSX:MRU) have been trading high while everything else has plummeted. In fact, both are trading near all-time highs at the moment.

So with that in mind, should grocery stocks be considered a defensive play in today’s market? Or will a crash eventually come?

Loblaw stock

As one of the largest grocery chains in Canada, Loblaw was practically the first to respond to the COVID-19 pandemic. The company announced that customers didn’t need to worry. There would be no food shortages, safety precautions would be met, and no, the company would not run out of toilet paper.

Since then, the stock has traded ever higher. Loblaw stock initially fell after the pandemic crisis, in fact it fell twice. First, Loblaw stock plummeted 18% and then again by 9%.

Since that last drop, however, the stock has been climbing back to all-time highs in the $70 range. As of writing, the stock trades at about $74 per share, an increase of 25% since the last dip.

While initial bullishness seems to have occurred with Loblaw stock, I don’t think investors should believe this will last long term. COVID-19 and social distancing are unfortunately here to stay for the time being. That means that even through all those good intentions, Loblaw can’t help but feel the impact on its bottom line.

Even with all of the banners of No Frills and Shoppers Drug Mart under the Loblaw name, each company will be heavily impacted by the crisis.

As earnings reports come in, I expect investors should see further drops in Loblaw stock price. Loblaw already operates in a competitive environment despite having the top two private labels in Canada, and its cost of capital is rarely covered by its returns on capital.

Add the push to increase the minimum wage in both Ontario and Alberta and Loblaw could have some serious trouble on its hands as its customers continue to go to cheaper stores like Wal-Mart and Costco, not to mention the increasing use of meal kits.

Metro stock

While analysts aren’t that bullish about the future of Loblaw, Metro stock is a different story. The stock also fell twice, by 12% and 9%, respectively, but has since bounced back by 15% to around $60 per share.

Metro is still within the highly competitive industry, but has a lot more room to grow out of its main banners. But if you’re going to buy up a stock like Metro, here are a few words of warning.

Metro is under the same pressures as Loblaw, with Wal-Mart, Costco and others all putting strain on the grocery stock. Metro simply does not have the resources that its competitors have at the moment — and that’s unlikely to change in the next decade. But where Metro might just have an edge is through its modernization investment.

The company recently spent $400 million to modernize and automate its facilities. In a post-pandemic world, this could be highly beneficial to get customers in and out of the door as quickly as possible.

With more automated programs in place, this will leave funds available to reinvestment and bring in more customers. While this won’t spur a lot of growth in the near future, Metro might be ahead of the curve in the long term.

But whether Metro will get to this point is up to debate. Online grocery stores, discount operators and meal kit expansion could seriously hurt Metro’s earnings.

All of these areas could see some increased growth, with consumers getting used to online shopping, which leaves Metro needing to find other areas for keeping up its earnings.

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale.

More on Coronavirus

Dad and son having fun outdoor. Healthy living concept
Dividend Stocks

1 Growth Stock Down 15.8% to Buy Right Now

A growth stock is well-positioned to resume its upward momentum in 2024 following its strong financial results and business momentum.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Stocks for Beginners

3 Things About Couche-Tard Stock Every Smart Investor Knows

Couche-tard stock (TSX:ATD) may be up 30% this year, but look at the leadership and history of the stock to…

Read more »

Plane on runway, aircraft
Coronavirus

Can Air Canada Double in 5 Years? Here’s What it Would Take

Air Canada (TSX:AC) stock has gone nowhere since 2020. Can this change?

Read more »

Senior housing
Stocks for Beginners

Home Improvement Stocks Are Set to Fall (When They Do, Buy These Like Crazy!)

Home improvement stocks are due to drop further in the coming months. But with solid underpinnings for the sector, it…

Read more »

An airplane on a runway
Coronavirus

Forget Boeing: Buy This Magnificent Airline Stock Instead

Boeing (NYSE:BA) stock is looking risky right now, but Air Canada (TSX:AC) stock? Much less so.

Read more »

Man considering whether to sell or buy
Stocks for Beginners

Goeasy Stock: Buy, Sell, or Hold?

When it comes to smart buys, goeasy stock (TSX:GSY) is up there as one of the smartest money can buy.…

Read more »

Woman has an idea
Stocks for Beginners

Here’s Why Magna International Is a No-Brainer Value Stock

Magna stock (TSX:MG) has been climbing back once more, but still offers huge value for long-term minded investors.

Read more »

Aircraft wing plane
Coronavirus

1 TSX Stock Down 60% That Could Bounce Back Stronger

Air Canada (TSX:AC) stock got severely beaten down in the March 2020 COVID crash. Here's why it's probably not going…

Read more »