Consumer staples are any products that are considered necessities. This ranges from food, to household products, to hygiene products. The investment case for this sector is simple. They are defensive, as they should do well regardless of the economic environment. In other words, they are economically insensitive. And this is a good thing to have in times like today, when investing in Canada is more challenging.
In this article, I will discuss two food and beverage (defensive) stocks that you can invest in to set you up with a solid defensive position.
Sunopta
SunOpta Inc. (TSX: SOY) specializes in the sourcing, processing, and packaging of organic and non-GMO (not genetically modified) food. The company has the advantage of being vertically integrated and having a large network of organic farms that they source from.
In the last 10 years, the organic foods market has more than doubled, with growth rates expected to continue to far exceed growth rates in the general conventional food market. In fact, by some estimates, the global organic food market is expected to grow at a compound annual growth rate of 13% from 2022 to 2030.
But it seems that while SunOpta is positioned in the right niche of the food and beverage industry, it has not been able to effectively capitalize on this. As you can see below, Sunopta’s volatile stock price has reflected this. While it may not seem like a defensive stock, it is, and I believe that in the long run this will come through.
However, the tide seems to finally be turning. In 2022, EBITDA increased 38%, and the company feels that revenue could double in the foreseeable future. So, while the company has struggled with profitability in the past, this revenue growth should result in economies of scale. This is what could take Sunopta to the next level in terms of earnings growth and profitability.
Loblaw stock: Investing in Canada’s top grocer
Loblaw Companies Ltd. (TSX: L) is Canada’s largest food retailer and leading pharmacy outlet. Once again, food and medical needs cannot be sacrificed when consumers are struggling financially – it really goes without saying. So, this leads me to Loblaw stock.
Not surprisingly, Loblaw stock is one of the great outperformers since the end of 2021 – up 85%. Yet, its valuation, in my view, remains attractive. In fact, Loblaw trades at only 15 times this year’s consensus earnings expectation. I don’t know if you agree, but I think that the company’s earnings stability, predictability, and resilience makes it deserving of a higher multiple.
It’s true that Loblaw is facing intense price hikes from its suppliers and food inflation remains a challenge. But, the company has still been able to post strong results in 2023. For example, revenue increased 6% to $13 billion and adjusted net earnings increased 10% to $505 million.
There’s no doubt that food inflation is continuing to drive shoppers to trade down to cheaper food items. But there are two factors that shelter Loblaw from the effects of this change. The first is that Loblaw carries many cheaper, private label products. The second is the fact that Loblaw operates multiple banners which appeal to a broad range of customers. For example, No Frills and Real Canadian Superstore are two of Loblaw’s discount banners that have been doing well recently.
Loblaw’s unmatched network of grocery store banners and leading position in pharmacy have catapulted it to where it is today. You see, this is a $37 billion company generating over $3 billion in free cash flow. This makes Loblaw stock a good defensive stock for those looking to invest in Canada.
