Can Grocery Stocks Outperform in the Second Half?

Loblaw (TSX:L) stock looks attractive after its latest correction, especially as inflation sticks around for a while longer.

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Grocery stocks can be a safe haven in times of economic recession. As times get uneasy and the economy looks to slip into a mild recession, they may be a wise play that could perform well for long-term investors.

Undoubtedly, it’s easy to be optimistic about all stocks after such a sudden rally in the averages. Though we’re in the midst of a bull market (some may dispute its sustainability), it’s never a wise idea to become complacent or discount the risks that had many hitting the panic button last year.

Inflation has gone down by a reasonable amount, but it’s still on the high side. And until it’s back to normalized levels, investors should not count on the central banks to back down.

Sure, rate pauses courtesy of the U.S. Federal Reserve (the Fed) are a good sign. But rate hikes could follow what could be a brief pause. Further, the Bank of Canada seems to be on the right track, continuing its fight against elevated levels of inflation.

Don’t dismiss inflation or a recession quite yet

It’s hard to dismiss inflation these days. Everything from rent to food has shot up to absurd levels. Indeed, inflation can be tough to put away. Its stubborn stickiness may be a source of further pain at the till for everyday Canadian consumers.

Grocery stocks are one of the few companies that may plow through a recessionary and inflationary world without taking any steps backward. As such, I view grocery stocks as wonderful bets to hedge against a “higher inflation for longer” scenario or an economic “rough landing,” which many simply do not see coming. In any case, I’d argue it’s best to be prepared for the worst while hoping for the best than the other way around!

At these levels, grocery stocks are actually looking quite reasonably priced. Let’s look at Loblaw (TSX:L) as one top pick to play the space. It’s led the pack and could continue to do so in the second half of 2023.

Loblaw

Loblaw is a top grocery play that I view as top pick in the space right now. Indeed, many consumers are unhappy with higher prices at the local Loblaw-owned grocery store. However, Loblaw is actually able to offer savings through its private label brands in No Name and President’s Choice. Of course, saving a buck or two here and there is always appreciated by shoppers.

Looking ahead, I’d look for more of the same, stability in harsh times. As the company embraces online shopping while bolstering its Shoppers Drug Mart business, I’d argue Loblaw is the perfect defensive at what I’d describe as a bargain-basement price.

Over the last year, L stock is up just 3%. The share stall comes following a massive surge off early 2021 lows that saw the stock more than double in price from trough to peak. That’s not bad for a boring grocery stock! I think the recent share stall is a buying opportunity for defensive investors.

At 15.2 times forward price-to-earnings (or 20 on a trailing basis), Loblaw stock still has room for upside given its unique defensive tailwinds. The stock recently corrected 11% from its high and looks like a great buy.

The road ahead for grocery stocks

Grocery stocks are a defensive way to dodge and weave past inflation and other macro headwinds. At these levels, Loblaw stock and peers look like prudent bets to get behind for the medium term. I think grocery stocks (like Loblaw) could be in a spot to outperform the broader TSX Index.

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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