2 Stocks That Could Beat a Bear Market

Small-cap TSX stocks such as Pet Valu should protect your investment from volatile bear markets in the upcoming decade.

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Investors should aim to create a diversified portfolio of growth, defensive, and dividend stocks. Ideally, no single stock should account for more than 10% of your portfolio, and no single sector should be over 25% of your portfolio, providing you with diversification and lowering overall risk.

Here, I have shortlisted two recession-resistant stocks, Pet Valu (TSX:PET) and Neighbourly Pharmacy (TSX:NBLY), that could deliver steady returns across market cycles. Here’s why.

The bull case for Pet Valu stock

The largest pet products retailer in Canada, Pet Valu trades at a market cap of $1.84 billion. Its system-wide sales in the second quarter (Q2) were up 10% year over year at $343.9 million, while revenue grew by 12.6% to $256.4 million. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew 3.9% to $53.8 million, indicating a margin of 21%.

Pet Valu opened seven new stores in the June quarter, taking its total retail store count to 758. The company aims to increase this number to 1,200 stores over time, which should help it drive sales higher in the upcoming decade.

However, free cash flow fell to $13 million in Q2 from $20.4 million in the year-ago period as Pet Valu invested in capital expenditures. Moreover, rising interest rates also acted as a headwind for the Canadian pet retailer in recent months.

Pet Valu also pays shareholders a quarterly dividend of $0.09 per share, indicating a forward yield of 1.4%. Despite its falling cash flows, Pet Valu’s payout ratio in the June quarter was well below 60%, providing it with enough bandwidth to reinvest in expansion projects and lower balance sheet debt.

Pet Valu is a recession-resistant company, as pet owners are unlikely to lower spending drastically even amid bear markets. The company increased sales from $573 million in 2019 to $952 million in 2022. It’s on track to end 2023 with sales of $1.07 billion and earnings of $1.6 per share.

Priced at 1.6 times forward sales and 16 times forward earnings, PET stock trades at a discount of 60% to consensus price target estimates.

The bull case for Neighbourly Pharmacy stock

The healthcare sector is defensive, making Neighbourly Pharmacy a top investment choice today. Neighbourly Pharmacy is Canada’s largest and fastest-growing network of independent pharmacies and is valued at $680 million by market cap.

In Q2 of 2023, the company increased

  • Revenue by 72% to $196.8 million;
  • Same-store sales by 4.1%;
  • Adjusted EBITDA by 76.5% to $19.9 million; and
  • Adjusted earnings by 22% to $0.11 per share.

Neighbourly Pharmacy closed two previously announced acquisitions ending Q2 with 291 locations in Canada.

During its earnings call, Neighbourly Pharmacy’s chief executive officer Skip Bourdo emphasized, “The team continues to deliver against our full agenda of growth-driving initiatives and a robust M&A [mergers & acquisitions] pipeline, while maintaining a firm focus on providing high-quality care to our patients.”

NBLY stock pays shareholders an annual dividend of $0.18 per share, indicating a yield of 1.1%. Its focus on expansion should enable earnings and dividend growth in the near term, increasing the effective dividend yield significantly.

Priced at 29 times forward earnings, NBLY stock trades at a discount of 60% to price target estimates.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Pet Valu. The Motley Fool has a disclosure policy.

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