The Canadian equity markets have turned volatile this month as investors are worried about rising inflation. Last week, Statistics Canada reported that Canada’s inflation in August rose by 4%, an increase of 0.7% from the previous month. Investors are concerned that rising inflation could prompt the central bank to raise interest rates further, leading to a recession. Amid these concerns, the S&P/TSX Composite Index has fallen 4.2% this month.
Despite the volatility, I am bullish on these two TSX stocks due to their solid underlying businesses and favourable operating environment.
Dollarama
Dollarama (TSX:DOL) is a discount retailer with an extensive presence across Canada, with 85% of Canadians having at least one store within 10 kilometres. Supported by direct sourcing and efficient logistics, the company is able to offer its products at attractive prices, leading to higher footfalls. In the recently reported second-quarter earnings, which ended on July 30, the company reported impressive same-store sales growth of 15.5%, with an increase of 12.9% in transactions and 2.3% in average transaction value.
Amid strong same-store sales and a net addition of 81 stores over the previous four quarters, the company has grown its top line and bottom line by 19.6% and 30.3%, respectively. After reporting its Q2 performance, the company’s management has raised its fiscal 2024 same-store sales growth guidance from 5-6% to 10-11%. The discount retailer is focusing on strengthening its direct sourcing capabilities to lower intermediary expenses and improve its bargaining power, thus providing excellent value to its customers.
Further, Dollarama expects to open 60-70 stores every year, thus increasing its overall store count to 2,000 by 2031. Dollarcity, where Dollarama owns a 50.1% stake, is also expanding its footprint. It plans to increase its store count to 850 by 2029 from its current store count of 458. So, these growth initiatives could boost its financials in the coming years, thus driving its stock prices. So, I am bullish on Dollarama despite the uncertain environment.
Canadian Natural Resources
Oil prices have risen over the last few weeks amid supply concerns and rising Chinese demand. Saudi Arabia and Russia have extended their voluntary production cuts for the rest of this year. Besides, the expectation of hurricanes hampering oil production in the Gulf of Mexico has increased oil prices.
Meanwhile, analysts are bullish on oil and expect it to trade at elevated levels in the near-to-medium term. Goldman Sachs has issued a 12-month price target of US$100/barrel for Brent crude, representing an upside of over 6% from its current levels. Higher oil prices could benefit oil-producing companies. So, I have picked Canadian Natural Resources (TSX:CNQ), which owns and operates diversified asset portfolios across North America, the North Sea, and Africa, as my second pick.
The company has planned to invest around $5.4 billion this year, strengthening its asset base. Supported by these investments, management hopes to grow its production by 5.5% this year. Besides, the reduction in debt levels and share repurchases over the previous three years could also contribute towards its financial growth in the coming quarters.
The oil and natural gas producer has raised its dividends for 23 years at an annualized rate of 21%, while its forward dividend stands at a healthy 4.04%. CNQ stock trades at 11.2 times analysts’ projected earnings for the next four quarters. Considering the favourable environment and growth initiatives, I believe CNQ would be an excellent buy right now.
