Warren Buffett famously said that investors should buy the stocks of great companies and hold them forever. At the Motley Fool, we take Buffett’s advice to heart and believe in the power of a long-term perspective when it comes to investing.
Although everyone likes to find a good, undervalued stock, sometimes it is better to buy the stock of a great company at an okay price as opposed to the stock of a mediocre company at a good discount. The stocks of businesses with sustainable, excellent performance make ideal buy-and-hold stocks.
For this reason, new Canadian investors should focus on the stocks of blue-chip companies with excellent fundamentals, understandable business models, essential products and services, wide economic moats, solid financial ratios, and good management. If you can snap up shares at a discounted price, that’s even better!
Dollarama
My beginner stock pick this week is Dollarama (TSX:DOL). With over 1,355 stores across Canada, DOL is a well-known brand to many Canadian consumers. While the stock tends to underperform times of economic growth, it thrives in recessions. With U.S. GDP slowing, this might be on the horizon.
When recessions (plus high inflation) wreak havoc on the budgets of Canadian consumers, discount stores like DOL tend to see a resurgence in buyers. When people need to slash their budgets, premium grocery stores and retail outlets are no longer viable. The best option here is a dollar store.
Valuation
DOL is solid enough of a company that I would not worry about trying to time a good entry price. The company is profitable with an operating margin of 20.75% and profit margin of 14.66%.
However, new investors should always be aware of some basic valuation metrics, so they can understand how companies are valued and what influences their current share price.
Currently, DOL is trading at $71.42, which is near the 52-week high of $76.8. In the current fiscal quarter, DOL’s 52-week low is $52.22. This is useful to know, because it gives us a sense of where the bottom of the price range may be if there is a correction.
DOL currently has a market cap of $19.22 billion with approximately 38.81 billion shares outstanding. This gives it an enterprise value of $22.61 billion with a enterprise value-to-EBITDA ratio of 18.64, which is similar to peers in the consumer staples sector.
For the past 12 months, the price-to-earnings ratio of DOL was 31.14, with a price-to-free cash flow ratio of 23.7, price-to-book ratio of 10.38, price-to-sales ratio of 4.57, and book value per share of approximately $0.06. These metrics suggest that DOL is not undervalued.
Is it a buy?
Despite its current share price being more or less fairly valued, long-term investors should consider establishing a position if they have the capital.
Consumer defensive stocks like DOL can add excellent growth prospects to your portfolio, especially during a prolonged bear market. These companies are able to maintain their margins during hard times, thanks to the essential nature of their products and services.
Over the next 10-20 years, your entry price won’t matter as much if DOL continues its strong track record of growth and profitability. Consistently buying shares of DOL, especially if the market corrects, can be a great way to lock in a low cost basis and a stable holding during a crisis.
