Rate hikes and recession fears have made it a difficult time to be a new investor. Indeed, it’s all too easy to take a rain check on the stock market (TSX Index or S&P 500) and go for bonds or GICs (Guaranteed Investment Certificates) instead. GICs, in particular, are free from the risk of loss, with some offering as much as 5% interest for a 12-14-month term. As the Bank of Canada (BoC) and Federal Reserve (the Fed) contemplate another few rate hikes in what could be the last of the current cycle, we may see GIC rates creep a bit higher from here.
It’s hard to pass up 4-5% rates on a GIC. Undoubtedly, investors need not risk any capital by going with them. There is an alternative (to stocks) these days. And as good as the risk-free rates are today, I think investors can still do far better with battered value stocks. Simply put, I view a lot of deep value out there after the great market selloff of 2022. While stocks have rallied nicely this year, the unloved corner of the market may still have good deals.
Spotting value in ugly corners of the stock market
Of course, you’ll need to channel your inner contrarian to take advantage of the best bargains. Dr. Michael Burry, the man made famous for The Big Short, has been a buyer of the regional bank stocks in the first quarter. As you may know, the regional banking crisis south of the border has been quite horrific. Bank failures have been atop the headlines, with some of the pain spreading to the big Canadian banks.
Burry may have a big tolerance for risk, but he’s all about unearthing deep value and getting greedy as others hit the panic button. Now, I’m not suggesting copying Burry by taking a deep dive into the regional banks. Rather, I think investors should be willing to take risks as long as the potential rewards make it worth their while.
In this piece, we’ll look at another not-so-loved corner of the market: retail. Personally, I think retail is rich with value but not quite as risky as the regional bank stocks in the states.
Canadian Tire: A buy-the-dip candidate
Canadian Tire (TSX:CTC.A) is a historic retailer whose shares have fallen on turbulent times once again. The roller-coaster ride could continue through the years, as we see how badly a recession impacts the company’s top and bottom lines. Personally, I think expectations are modest with shares going for less than 9.5 times trailing price to earnings.
Over the years, Canadian Tire stock has seen quite a bit of multiple compression. Retail is an ugly place in the face of high rate-driven economic pressures, after all. With a yield that’s also at 4.1%, Canadian Tire is more of a value and dividend play than it was over a decade ago.
Despite big upgrades to its digital capabilities, a spruced-up loyalty program, and the inclusion of exclusive-branded products, the stock just hasn’t been able to sustain a climb to 2021 highs. As a discretionary retailer, there could be a lot to lose as the economy pulls the brakes. That said, I expect Canadian Tire will find a way to fall on its feet. I think the company is in far better shape today than in the years leading out of the pandemic.
The bottom line
Consumers have been more deliberate with spending of late. As the recession rolls around, the purse strings could tighten even further. And that’s a major risk for CTC.A stock. Personally, I think such recession risks are priced in here. Canadian Tire is a wonderful retailer that will be ready to roar come the next business cycle, which may lie shortly after the expected “shallow recession” that’s to come.