Loblaw Stock: Can the Impressive Rally Continue?

Loblaw (TSX:L) stock isn’t as cheap as used to be, but I still think it’s worth watching at current levels.

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Shares of Canadian grocer Loblaw (TSX:L) have been going strong since bottoming out in early 2021. Though inflation and recession jitters, the grocery giant has found a way to navigate higher. Though the rally has slowed down a bit, with shares pretty much flat year to date, I think the path of least resistance could be higher as we move ever so closer to an economic recession in Canada.

The two-year run has been impressive. Shares have nearly doubled over the timespan. And though the retailer looks more or less fairly valued at 21.1 times trailing price to earnings (P/E), I think the firm has more outperformance left in the tank as it looks to pass off higher prices to consumers with little issue.

Loblaw is one of the lower-cost grocery retailers in the country. When it comes to great deals on groceries, it’s tough to top Loblaw stores like Superstore, which doesn’t require any sort of membership to shop. As economic conditions get tougher, Loblaw could continue to enjoy the elevated level of foot traffic. The company’s private-label brand has really taken off in recent years. With food prices soaring as quickly as they have, private labels have been essential to staying below one’s budget.

Whether we’re talking about the value-maximizing No Name brand or the tastier President’s Choice offering, it’s clear that Loblaw knows how to achieve results from its private label business.

Loblaw stock: Has the easy money already been made?

It’s never ideal to place a bet on a stock after an already impressive run. Last year, many newbie investors learned the hard way that momentum investing can have devastating consequences. Though Loblaw stock isn’t nearly as cheap as it used to be, it’s also not pricey. In fact, I’d argue Loblaw is still a worthy bet for investors who lack resilient firms that can move through a recession without enduring too much earnings damage.

Further, inflation hasn’t gone away quite yet. It’s fallen quite a bit, but it’s still on the high side. For the month of April, inflation came in at a hot 4.4%. That’s a hair higher than the 4.3% seen in March. Indeed, inflation could prove far stickier than we expect.

As rates keep climbing and inflation keeps sticking, I think the stage could be set for more outperformance from the grocery retailers. Not only is Loblaw in a good spot in a hard economy, but it’s also doing a lot of things well behind the scenes. As the firm looks to improve operational efficiencies, I’d look for the firm to make the most of the opportunities ahead.

The Foolish bottom line on Loblaw shares

We continue to see headlines regarding Loblaw’s hefty price hikes and Galen Weston’s lofty payday. Even if the firm is serving up “outsized” price hikes on select food items, I’m not so sure any potential price freezes will stop L stock in its tracks. Inflation and economic headwinds may be far from over. And if they are, Loblaw stock may be a must-watch for investors seeking to make it through another year of market-wide turbulence.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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