A recession is just around the corner, with some pundits expecting it to happen in the second half. Indeed, the autumn season could be a chilly one for stock investors. Still, I don’t think Canadian investors have to worry.
Remember, the markets have seen this recession coming from a country mile away. Though there may still be more pain ahead, it ultimately comes down to how the current slate of expectations stacks up against actual results.
It’s unclear as to whether the earnings hit will be modest and if the ensuing recovery will be sharp. I’d personally temper my expectations. However, I wouldn’t pass up the many market bargains that exist right now. Like it or not, the stock market will always be unpredictable.
Recessions are never good for stock returns. However, the effect tends to be baked into valuations quite quickly. Sometimes, too much bearishness can be factored in before the recession “storm” finally does hit.
The calm before the recession
As the calm before the storms sets in, investors should look to be selective and insist on deeper value and larger margins of safety to minimize the chance of losses while improving one’s shot at better above-average results.
It’s never a bad idea to play a bit of defence, especially if valuations haven’t been driven up to the moon by panicked investors. After a hot start to 2023, with tech (and other battered plays) leading the way, I think it’s defensive stocks that are being neglected as others chase the gains to be had in a rally off 2022’s lows.,
If you’re not willing to follow the herd back into the tech trade, I think it’s wise to zig while others zag by getting back into the defensive dividend stocks before the next scary event sends shivers down investors’ spines!
At this juncture, I like the grocers. They’ve been unstoppable of late and could fare well as the recession happens.
Loblaw
Loblaw (TSX:L) saw its CEO get grilled over the record profitability of Canada’s top grocer retailers. Undoubtedly, profiteering and greedflation have been the terms associated with the top grocery plays. Despite the questionable headlines, I remain a raging bull on the grocers, especially Loblaw, which has flexed its private-label muscles of late.
The stock’s at a fresh new high of nearly $127 per share. Loblaw president Galen Weston received a $1.2 million raise for his performance. Whether or not it’s warranted, I still view Loblaw stock as a recession fighter for any portfolio.
The stock goes for 22 times trailing price-to-earnings (P/E), with a 1.29% dividend yield. With a 0.06 beta (nearly no correlation to the market averages), L stock is a nice shelter from any storm you see coming.
North West Company
North West (TSX:NWC) is a lesser-known retailer that’s flirting with new highs. The stock is cheaper than Loblaw, with a larger dividend yield.
At writing, shares go for 16 times trailing P/E, with a 3.82% dividend yield. For those unfamiliar with the firm, it’s a retailer specializing in serving remote areas in the continent’s northwest region.
Retail is a tough place to thrive in. There’s tonnes of competition. North West has found a niche within the industry, and it excelled. I expect more outperformance from the firm as it looks to expand its multiple into a recession.
