Last year’s bear market was a result of inflation woes and rapid rate hikes. Broader Canadian markets lost 8%, while the S&P 500 dropped nearly 20% in 2022. Markets look even worse placed this year with a more-worrying banking crisis and an impending recession. Only time will tell how markets end up in 2023. However, at this point, it seems quite evident that market volatility will likely be concerning and a major driving factor for shareholder returns.
Offensive investors investing in defensive stocks need not worry.
Canadian discount retailer Dollarama (TSX:DOL) is an appealing bet in almost all kinds of markets. Its strong execution and fundamental business strength have driven stable earnings growth over the years. DOL stock returned 25% last year, notably beating markets.
DOL stock has lost 8% in the last two months as markets dumped defensives and shifted focus to riskier assets. However, as macroeconomic troubles turn up their heads again, stocks like DOL will likely steal the limelight.
Dollarama has seen consistent profitability and margin stability even in inflationary environments. Its large countrywide footprint and efficient supply chain have facilitated stable financial growth in the last decade.
The discount retailer has maintained a consistent operating margin of around 25% in the last five years, a rare achievement in the retail industry. Such stable financial growth has created handsome value for shareholders.
DOL stock will likely repeat last year’s performance this year. It is well-positioned to outperform due to its stable earnings growth and investors searching for relatively less-volatile options.
Bell Canada (TSX:BCE) is one classic defensive bet with its less volatile stock and juicy dividend yield. Among its two top telecom peers, BCE looks well placed to outperform in the long term. Its dividend currently yields 6.5%, the highest in the industry.
Like utilities, telecom companies also grow slowly, irrespective of broader economic cycles. That’s due to their stable and regulated business model. BCE has managed to increase its earnings by 3%, compounded annually. That’s way lower than broader markets. However, this slow-but-stable growth facilitates stability.
The Canadian telecom industry is going through some major changes with a 5G rollout and industry consolidation. While Canada’s leading wireless player by subscribers is busy growing inorganically, BCE has been investing in its network, which will likely expand its subscriber base. Its balance sheet is much more stable and can support organic growth.
Canadian Natural Resources
Canada’s biggest energy producer Canadian Natural Resources (TSX:CNQ) is one of the attractive bets in 2023. The stock is down 10% this month due to a weakness in oil prices driven by recession fears. However, it will likely revive later this year, given earnings growth, strong share buybacks, and recovery in oil prices.
CNQ has achieved its net debt target and is currently sitting on the soundest balance sheet seen in years. It aims to allocate 100% of its free cash flows to shareholder returns in 2023, which will accelerate its share repurchases and dividends. The dividend currently yields 5%, and investors can expect more special dividends this year. CNQ’s superior asset quality and scale drive stable cash flows even when oil prices are low. The energy major will likely see superior free cash flows in 2023 as well, creating more shareholder value.