Ditch Canadian Tire (TSX:CTC.A) Stock: Buy This Instead

Value investors are flocking to Canadian Tire Corporation (TSX:CTC.A) stock, but you should be buying the company’s landlord instead.

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Canadian Tire Corporation (TSX:CTC.A) is one of the largest companies in Canada. Its size makes it one of the most popular TSX stocks. With shares down 40% since February, value investors are paying attention.

But if you want to capitalize, don’t buy Canadian Tire stock. Instead, take a look its landlord.

Canadian Tire will survive

Here’s the good news: Canadian Tire will survive. Last quarter, it had more than $400 million in cash and short-term investments on its balance sheet. The business maintains investment-grade credit ratings, and due to its $6 billion market cap, shouldn’t have trouble raising additional capital.

Here’s the bad news: Canadian Tire is facing an extremely difficult road ahead. Just because it will survive the current recession doesn’t mean that it will thrive.

In April, Trudeau unveiled the worst jobs report in Canada’s history. Millions of people are either out of work or have seen their hours slashed. The coronavirus pandemic has crushed foot traffic at retail stores like Canadian Tire. Meanwhile, the oil bear market could add even more pressure to the economy.

Owning giant brick-and-mortar stores is a high fixed-cost business. Whether there’s 10 people in your store or 1,000, it costs the same to maintain the infrastructure, which means decreased sales will have a disproportionate impact on Canadian Tire’s bottom line. In the quarters ahead, don’t be surprised if the company posts a net loss.

Bet on this company instead

Due to its access to capital, Canadian Tire will survive the current downturn. But as we’ve seen, the business certainly won’t thrive in 2020. It will take months, perhaps years to fully recover.

But how do you bet on this “survive but not thrive” scenario? By investing in the company’s landlord, CT Real Estate Investment Trust (TSX:CRT.UN).

CT Real Estate owns the land on which Canadian Tire stores stand. Both companies operate under a preferred agreement that gives CT Real Estate the right of first refusal on any new retail location. Don’t expect much growth in 2020, but the existing stores should continue to exist in anticipation of the recovery. That’s good news for CT Real Estate shareholders.

Canadian Tire leases the property from CT Real Estate on long-term contracts. The average duration is 10 years, but some contracts span several decades. Every deal has built-in escalators that compensate for inflation.

As long as its properties are leased, CT Real Estate will collect the rental income. Because long-term contracts underpin almost every deal, it’s not easy for Canadian Tire to renege due to short-term pressures. Even without the contracts, it’s unlikely that the company would close a profitable store after a single down year.

If you want to capitalize on the downturn, don’t buy Canadian Tire stock. Instead, buy CT Real Estate, which has significantly less risk, and can thrive simply through the survival of its biggest tenant.

Thanks to the correction, investors can now buy into CT Real Estate with a 6.6% dividend. That’s one of the highest payouts in history, all backed by decade-long agreements.

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.

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