Most Canadian households engage in two different types of spending: necessary and discretionary. Necessary spending includes things like debt repayment, utility bills, insurance, etc.
This spending continues regardless of the economic conditions and even the financial condition of the individual or household. In contrast, discretionary spending experiences an uptick when the economy is recovering, and the cost of borrowing is relatively low.
These characteristics are reflected in the stocks representing companies that rely upon necessary or discretionary spending for their revenues, though not consistently. Right now, many discretionary stocks are thriving, while others are either bouncing back or waiting for the right opportunity.
Guelph-based Linamar (TSX:LNR) started out as a humble machine shop and has now grown into an international organization with a presence in multiple countries. It develops products in three main categories: mobility (various vehicle parts), industrial (most agricultural machinery), and electrification products, which ties into mobility if you consider the ongoing advent of electric vehicles (EVs).
The stock was already in a bear market phase when COVID hit, and the 2020 crash became a continuation of an existing downward pattern. The company benefited from the subsequent bullish phase with the rest of the market, followed by another correction.
However, it has been building positive momentum for a while now and has gone up 18% since the beginning of the year. Its undervaluation may be a sign of further growth to come.
Montreal-based Gildan Activewear (TSX:GIL) has established a strong presence in the North American textile industry. It also has an impressive international presence, with manufacturing facilities in multiple countries, allowing it proximity to its target markets.
Five different clothing brands fall under the Gildan umbrella, including Gildan itself, which is a well-known name in both retail and wholesale markets.
Since clothing is a necessity, and Gildan makes practical, everyday clothing items instead of luxury wear, it has some inherent resilience against markets where discretionary spending is down.
Still, the company went through a major and a minor correction phase in the last five years, and it’s still reeling from the second one, though its valuation and recent performance are good signs that the stock will fully bounce back within the year.
Edmonton-based AutoCanada (TSX:ACQ) has a network of about 65 locations, where it sells both new and used vehicles. The locations are in both Canada and U.S., and the company has partnerships with some of the best-selling brands in both countries. It’s also well-positioned to thrive in an EV boom and will benefit from an uptick in the sales of EV vehicles, especially in Canada.
The most attractive feature of this stock is its valuation. The company is trading at a price/earnings ratio of just 6.5. The stock is already on its way up and has grown about 13% in the last 30 days alone. So, it’s already bouncing back, and capturing and riding this positive momentum now can be a positive development for most Canadian investors.
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It’s too soon to say whether the stocks are entering a long-term bullish phase (when they bounce back) or if it would just be an oscillation in the cycle. Still, all three companies have a healthy presence in their respective industries and niche, which strengthens their positions as long-term holdings.