Over the last few years, the economy has faced several headwinds resulting in a tough time for consumers, businesses, and consequently stocks. And now, with many expecting a recession, stocks in almost all sectors have been seeing an impact on their valuations, especially discretionary businesses such as many retail stocks.
In these environments, particularly when there is so much uncertainty, it’s always difficult to make confident investing decisions.
Plus, investing can become even more difficult when you’re looking at industries that are expected to see an even more severe impact in the current economic environment, such as many retail stocks are today.
Not every retail stock is discretionary, though, and the impact on each company will depend on many different factors.
So let’s look at how we can invest in retail stocks today and what opportunities investors have when everyone is worried that a recession is on the verge of materializing.
Retail stocks with defensive qualities
As I mentioned above, although many retail stocks sell discretionary products, there are retail stocks that you can consider, such as Dollarama (TSX:DOL), that sell staples and more defensive products.
In fact, discount retailers like Dollarama can not only weather the storm of a recession better than discretionary retailers. History has shown that they can actually excel in these environments.
We’ve already seen the impact that the worsening economic environment has had on Dollarama over the last two years, as surging inflation has driven more shoppers to look for deals at the discount retailer. And a recession could prove to have similar results as aggregate incomes fall and consumers look to stretch their budgets by buying more of their essential products at Dollarama.
Furthermore, in addition to the momentum Dollarama could see if a recession was to materialize, it has also been an impressive long-term investment even as the economy has been in growth mode.
Over the last 10 years, it has earned investors a total return of 655% or a compounded annual growth rate of 22.4%, incredible results. Furthermore, it hasn’t experienced a single year where its sales didn’t grow by at least 6.3%.
So if you’re looking to increase exposure to the retail sector but are worried about a potential recession on the horizon, a defensive growth stock like Dollarama is one of the best investments you can make today.
Ultra-cheap stocks with years of growth potential
Defensive businesses are great, but as we see with Dollarama, many of them don’t offer attractive discounts.
So another option investors have is to buy high-quality companies, ones that would typically trade with a premium but are cheaper today due to the uncertainty in the economy and stock market, as well as the concerns investors have about how these retail stocks may perform in a recession.
Recessions certainly impact many stocks, but they also don’t last forever. So often, these environments allow investors to buy high-quality companies at heavily discounted prices.
And as long as you plan to buy these stocks and hold them for the long haul, it doesn’t matter where the stock price goes in the next 12 to 24 months.
One excellent stock that’s trading significantly undervalued today is Aritzia (TSX:ATZ), the women’s fashion retailer and one of the top growth stocks in Canada.
Aritzia is down roughly 40% from its high reached at the start of 2022, despite continuing to grow at an impressive rate.
In the last 12 months, its sales have increased by 47%, and its gross profit is up by 40%. Furthermore, in the last three years, its sales have more than doubled as it continues to gain popularity, grow its store count, and expand its presence south of the border.
With Aritzia trading at just over $36 a share, it now has a forward price-to-earnings ratio of 24.8 times, well below its three-year average of 37.4 times.
So if you’re looking for high-potential retail stocks that you can buy undervalued in this environment, a stock like Aritzia is certainly one to keep your eye on.
