Record-high inflation and rapid rate hikes have notably weighed on markets since last year. Consumer stocks are the first ones to take a hit, as spending dips amid higher inflation. With rising recession fears, we might see an even bigger impact on them in the next few months.
However, some names have stood resilient and have remarkably outperformed broader markets. Their pricing power and fundamental strength drove this outperformance amid these challenging times. Here are two of them that could continue to outperform.
North West Company
North West Company (TSX:NWC) is a popular retailer in Northern Canada, Alaska, and the South Pacific. While it seems like a dull, boring business, it has consistently delighted shareholders.
NWC stock has returned 6% in the last 12 months. That’s a decent return in the challenging inflationary environment when the Index itself lost 7%. NWC has outperformed even in the long term. It has returned 177% in the last 10 years, notably beating the TSX Composite Index.
North West is an established name among the rural communities of northern Canada. A challenging geographical setting and mediocre growth have kept competition away where North West operates. It does not see a huge variance in demand based on economic cycles due to its product mix of foods and other essential items.
As a result, it has shown handsome earnings stability, where operating margins came in at 10% in the last few years. Its return on equity has also been stable at 20% in the last five years, indicating strong profitability.
Although it does not have a fancy business model, North West’s strong execution has led to a decent shareholder value. Its high-quality earnings and stable dividends make it an appealing name in almost all kinds of economic cycles.
Some consumer sectors, like luxury goods, have taken a huge hit since late 2021. As spending dries up amid higher inflation, these companies see lower financial growth. However, in case of consumer staple companies, there is reasonable demand visibility that facilitates financial stability.
Dollarama
Canadian dollar-store operator Dollarama (TSX:DOL) is another attractive bet in the current rising-rate environment. It has gained 12% in the last 12 months, notably beating TSX stocks.
Dollarama’s low-cost proposition offers more value to customers in this inflationary environment. As a result, it has seen rather superior revenue growth in the last few quarters. Its operating margins have also been notably higher beyond 20% consistently for the last many years. In comparison, the peer group average is around 10%.
Driven by its solid business model and consistent financial growth, Dollarama has created massive shareholder value in the long term. It has returned 700% in the last decade, remarkably beating TSX stocks at large.
DOL stock is currently trading at a price-to-earnings ratio of 30 and looks to be trading at a premium compared to its historical average. However, its dependable financial growth and potential to outperform in the current environment make it stand tall among its peers.
