Almost all market downturns are different. They have different causes, different triggers, and a variety of internal and external elements that may influence the pace and timeline of recovery from the downturn. Many of these variables also determine which stocks might remain relatively safe from the market-wide slump and which industries might experience the worst of it.
However, there are certain industries and business models that may have the potential to remain afloat in a wide variety of market downturns, and Metro (TSX: MRU) is a good example. It’s counted among the blue-chip stocks in Canada, but that’s not the only “sustainability” credential it has.
The business
It’s important to understand that even a safe, defensive stock like Metro, hailing from a safe industry (consumer staple), is not perfectly immune to market downturns and economic conditions. A good perspective would be to realize that these stocks are less vulnerable compared to most others against negative market forces. That’s primarily due to its business model.
Metro has two businesses – food and medicine. The company has a chain of about 975 food stores and 645 drugstores. While the bulk of these are concentrated in Quebec, which might not be ideal from a geographic diversity perspective, it offers a different benefit – a consistent and loyal consumer base.
Companies like Metro rely upon the community ties and roots of the individual brands under their portfolio, like Jean Coutu.
The stock owes much of its sustainability to a necessity-based business model. Food and medicine are two of the highest priority expenses in almost any household, regardless of their current economic conditions. This gives the company financial resilience, even in weak markets. The company maintained steady growth in its sales number in 2020 as well.
The stock
One of the best examples of the stock’s resilience during a market downturn was its performance during the 2020 market slump. The TSX composite lost a third of its value between February and March 2020, and it took the index till the end of the year to fully recover.
In contrast, Metro stock didn’t even fall 7%, and it recovered in about two weeks. It did experience a slump at the end of the year but recovered in less than one year.
As a growth stock, Metro might not exactly be considered top-tier for the level of growth it has offered, but it’s a top pick for its consistency and resiliency.
The company grew by about 210% in the last 10 years, and if you add the dividends, the overall returns are over 265%. It’s an established dividend aristocrat that has grown its payouts for about 28 consecutive years, but the yield is usually too modest to encourage investors.
Foolish takeaway
Metro’s business model and performance during COVID crash and that weak economic period as a whole make it a healthy and reliable stock to hold in a market downturn. The supermarket can help keep a segment of your portfolio afloat in a bear market.
