Dollarama (TSX:DOL) is precisely the type of business you’d want to invest in if you’re at all worried about a severe recession (or depression) that the insidious coronavirus (COVID-19) is going to leave behind.
The unemployment claims amid this crisis have been unprecedented, and they could rival the rate of unemployment during the Great Depression. While governments and central banks around the world have been throwing everything but the kitchen sink to counteract the pain that lies ahead, investors would be wise not to prepare their portfolios for could be years of economic distress.
Dollarama: A defensive growth stock that could outperform in a severe recession
Dollarama stock has been a roller-coaster ride over the past few years thanks to company-specific issues (such as meagre comps) and fading growth prospects that have yet to be addressed.
The former market darling previously suffered a major correction, one that I called back in 2018. At this market crossroads, the stock is modestly valued and is in a position to hold its own quite well, as the economy falls into a recession. Given the defensive nature of dollar stores, Dollarama may be one of few TSX stocks that could stand to rally should the broader markets crumble like a paper bag on bad earnings and horrendous economic data, which are coming down the pipeline.
Given the unprecedented unemployment, which has the potential to get much worse over the coming months, consumers are going to need every dollar to go as far as it can. And for Dollarama, which offers arguably one of the best value propositions for low-cost goods, the coming economic downturn could act as a significant boon for comps.
A mixed quarter that was nothing to write home about
More recently, Dollarama reported somewhat decent fourth-quarter fiscal 2020 results that saw decent same-store sales growth (SSSG) comps (which isn’t saying much as the SSSG numbers were being compared to a brutal quarter).
Although management didn’t give forward-looking guidance, the company is poised to take more of a hit for the duration of the coronavirus-induced lockdown, as many of its stores face reduced hours and traffic. Once the economy re-opens and it’s safe to go outside again, I believe Dollarama could face a massive sales boost, as belt-tightening Canadians look to get the most bang from their buck.
Moreover, Dollarama also has more than enough liquidity to ride out a potentially prolonged pandemic-induced lockdown. The dividend is safe and could be in a position to buck the “dividend-reduction trend” and grow in a post-pandemic recession (or depression) environment.
What about valuation?
At the time of writing, Dollarama stock trades at 3.6 times sales and 19.4 times next year’s expected earnings, both of which are considerably lower than the stock’s five-year historical average multiples of 4.4 and 22.4, respectively.
As a defensive growth stock that can outperform in times of economic hardship, Dollarama looks like a bargain for Canadian investors looking to take more of a “risk-off” approach as we go deeper into uncharted territory.
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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 Joey Frenette has no position in any of the stocks mentioned.