We keep hearing about whether the Canadian or U.S. economy is headed for a soft or hard landing. Indeed, it would be nice to have interest rate hikes push us into a mild, manageable period of economic sluggishness. However, we must never rule out the possibility of a rougher landing.
Indeed, it’s hard to tell just how hard the impact will be as the effect of recent interest rate increases comes into full effect.
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Hard landing or soft landing? That is the question!
Higher rates could weigh not just on corporate earnings but also on forecasts moving forward. It’s not an ideal situation in the slightest. But with so much damage already done across the broader basket of stocks, I think some degree of recession risks are already considered by Mr. Market. The real risk, though, could lie in a rougher landing for the economy as the weight of high rates begins to cause firms to fall to their knees.
For investors, it shouldn’t matter when central banks hit that pause button or when rates will fall. Instead, investors should be prepared for all scenarios, including those that entail more pain to come. That means being ready for a hard economic landing as you hope for a soft one. Though many talking heads are calling for a soft landing, it’s never a good idea to let one’s guard down as others around you do.
In this piece, we’ll look at two defensive stocks that will fare well over the long run, regardless of how bumpy the ride will be for the rest of 2023 and the start of 2024.
Dollarama
Dollarama (TSX: DOL) is a discount retail juggernaut that may very well be one of the few firms out there that’s actually benefiting from high levels of inflation.
As costs of living surge while wages remain static, budget cuts are in order. And judging from the traffic over at the local Dollarama, it certainly seems like many consumers are hungry for a bargain. Indeed, Dollarama has had to raise prices. But it still offers greater price certainty and usually better deals than most other retailers. That’s enough to win over the business of purse-tightening Canadians.
Today, the stock’s at a new high of $96 and change. At 31.1 times trailing price to earnings (P/E), I still think the dollar-store chain is too cheap. Recession or not, it’s hard not to love Dollarama as it continues to draw in bargain hunters. The stock itself, I believe, remains a compelling value.
Loblaw
Loblaw (TSX: L) is another retail firm that’s well-equipped to tackle a recession year. The stock has corrected more than 12% from its all-time high, likely because shares were quite frothy after its incredible 2021-22 rally.
At writing, shares of the top grocer trade at 18.14 times trailing P/E. With a recession ahead, lingering food inflation, and a solid line of low-cost generics, Loblaw seems to be a great retailer to own in this environment, perhaps second only to Dollarama.
The 1.6% dividend yield is a nice bonus for investors looking to batten down the hatches in case the economic landing hits our portfolios harder than expected.
