Canadian Tire (TSX:CTC.A) Stock Just Cratered 35%: Time to Buy?

Canadian Tire Corporation Limited (TSX:CTC.A) is one of the largest retailers in Canada, with a century-long history. Is the downturn a buying opportunity?

| More on:
Handwriting text writing Are You Ready For Tomorrow question. Concept meaning Preparation to the future Motivation Stand blackboard with white words behind blurry blue paper lobs woody floor.

Image source: Getty Images

Canadian Tire Corporation Limited (TSX:CTC.A) is a Canadian staple. More than 90% of Canadians shop at one of its stores every year. Its name-brand recognition is ubiquitous.

Despite these advantages, the stock still cratered by 35% during the recent market crash. Is this your chance to buy a blue-chip stock at a deep discount?

The headwinds are clear

It’s not hard to see why this stock is struggling. As a major retailer operating hundreds of stores, Canadian Tire will be crushed by the coronavirus pandemic. Foot traffic will fall significantly due to social distancing.

Meanwhile, the worst jobs report in Canadian history was revealed last week. Since the downturn began, more than three million Canadians have either lost their jobs or seen their hours reduced.

There’s also another challenge that has been overshadowed by the coronavirus crisis: the oil price collapse.

Oil started the year priced at US$60 per barrel. Today, prices are closer to US$20 per barrel, a rare event. Prices this low have only been experienced twice in the past 60 years.

The loonie has taken a hit given that the energy sector accounts for 10% of Canada’s GDP, not to mention billions in government tax revenue. But the biggest concern for Canadian Tire will be employment. More than 800,000 Canadians are employed in the energy sector. Millions more are indirectly reliant on the oil and gas industries.

If oil prices remain at current levels for the rest of 2020, Canada will take a huge economic hit. And unlike the coronavirus impact, this disruption could be permanent, as the vast majority of Canada’s oil and gas projects are generating massive losses right now.

Many mega-projects require oil prices of US$40 per barrel or more simply to break even. Oil prices would need to double to reach those levels.

Canadian Tire investors are focused on the coronavirus impact, but long term, the oil price collapse could create economic havoc across wide swaths of the country. It could permanently shutter large producers, greatly reducing employment and discretionary spending.

Is Canadian Tire a buy?

Canadian Tire stock now trades at 2014 prices. On many metrics, the stock looks cheap. Shares trade at 1.5 times book value, a nearly 25% discount to its five-year average. But is that cheap enough to warrant an investment?

On March 23, the stock’s valuation bottomed out at 1.1 times book value, which represented a 50% discount to its five-year historical average. That’s likely the discount you’d expect for a brick-and-mortar retailer that will see sales crushed in 2020. Only if you’re expecting a quick economic rebound would a 25% discount make sense.

The fact is that the economic recovery won’t be quick. As we’ve seen from past downturns, economic disruption takes months, sometimes years to fully correct. Just take a look at the S&P/TSX Composite Index, which is currently trading at 2007 prices!

If you think the economy is out of the woods, perhaps you’ll heed the advice of Warren Buffett’s long-time partner, Charlie Munger.

“We’re not playing,” Munger told The Wall Street Journal, indicating that it’s still time for caution. “We’re like the captain of a ship when the worst typhoon that’s ever happened comes. We just want to get through the typhoon.”

When asked if he and Buffett were preparing to buy at current levels, Munger didn’t express much bullishness. “We will be fairly conservative,” he answered.

To be certain, there are many stocks now trading at lucrative valuations. But buying a traditional retail stock at a 25% valuation discount isn’t a compelling deal.

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 Ryan Vanzo has no position in any stocks mentioned.

More on Coronavirus

little girl in pilot costume playing and dreaming of flying over the sky
Coronavirus

Air Canada Stock: How High Could it go?

AC stock is up 29% in the last six months alone, so should we expect more great things? Or is…

Read more »

eat food
Coronavirus

Goodfood Stock Doubles Within Days: Time to Buy?

Goodfood (TSX:FOOD) stock has surged 125% in the last few weeks, so what happened, and should investors hop back on…

Read more »

stock data
Tech Stocks

If I Could Only Buy 1 Stock Before 2023, This Would Be It

This stock is the one company that really doesn't deserve its ultra-low share price, so I'll definitely pick it up…

Read more »

Aircraft Mechanic checking jet engine of the airplane
Coronavirus

Air Canada Stock Fell 5% in November: Is it a Buy Today?

Air Canada (TSX:AC) stock saw remarkable improvements during its last quarter but still dropped 5% with more recession hints. So,…

Read more »

Airport and plane
Coronavirus

Is Air Canada Stock a Buy Today?

Airlines are on the rebound. Does Air Canada stock deserve to be on your buy list?

Read more »

A patient takes medicine out of a daily pill box.
Coronavirus

Retirees: 2 Healthcare Stocks That Could Help Set You up for Life

Healthcare stocks offer an incredible opportunity for growth for those investors who look to the right stocks, such as these…

Read more »

sad concerned deep in thought
Coronavirus

Here’s Why I Just Bought WELL Health Stock

WELL Health stock (TSX:WELL) may be a healthcare stock and a tech stock, but don't let that keep you from…

Read more »

healthcare pharma
Coronavirus

WELL Stock: The Safe Stock Investors Can’t Afford to Ignore

WELL stock (TSX:WELL) fell 68% from peak to trough, and yet there's no good reason as to why. So now…

Read more »