Over the last two years, central banks worldwide have adopted monetary tightening initiatives to curb inflation. With inflation showing signs of easing, investors are hopeful that central banks will start cutting interest rates this year. However, amid the impact of the monetary tightening initiatives, global growth could slow down this year. So, I expect equity markets to be volatile in the near term.
Amid the uncertainty, I expect defensive stocks to outperform this year. Here are my three top picks.
Dollarama (TSX:DOL) is a discount retailer operating around 1,540 stores across Canada. Despite the challenging macro environment, the company continues to post solid performance, with its same-store sales growing at 14.4% in the first three quarters of this fiscal year.
Leveraging its superior direct-sourcing platform, the company enjoys higher bargaining power while lowering intermediatory expenses. Further, its capital-efficient business model and improving operating efficiency have allowed it to offer its products at attractive price points. So, the company has been witnessing higher footfalls even during the inflationary environment.
Further, the Montreal-based discount retailer is expanding its footprint by adding around 60-70 new stores yearly. Besides, the company’s subsidiary, Dollarcity, is also growing its store count, which could drive Dollarama’s net income. Boosted by its solid cash flows, Dollarama has hiked its quarterly dividend 12 times since 2011. Considering all these factors, I believe Dollarama would be an excellent buy.
Waste Connections (TSX:WCN) is my second pick. The non-hazardous solid waste management company operates primarily in secondary and exclusive markets. So, it faces lesser competition, thus allowing it to enjoy higher margins. Besides, the company is continuing with its strategic acquisitions.
Last month, it signed an agreement to acquire 30 energy waste treatment and disposal facilities in Western Canada from Secure Energy Services for $1.1 billion. The company’s management expects to close the deal this quarter. These acquisitions could raise its annual revenue by $300 million. Also, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) margin could increase by 50 basis points due to these facilities’ high margin and disposal-oriented profile. The transaction could also be accretive to its EPS (earnings per share) and cash flows.
Besides, the Toronto-based solid waste management company is developing several renewable natural gas (RNG) and resource recovery facilities, which could boost its financials in the coming quarters. The company has also raised its quarterly dividends at a CAGR (compound annual growth rate) of 15% since 2010. So, I am bullish on Waste Connections despite the uncertain market environment.
BCE (TSX:BCE), one of the prominent players in the Canadian telecommunication sector, is my final pick. The need for telecommunication services is rising due to digitization and growth in remote working and learning. Besides, telecom companies enjoy stable cash flows due to their recurring revenue source. Further, the high initial investment and regulatory approvals have created a natural barrier for new entrants, thus allowing existing players to protect their market share.
Meanwhile, the telecom sector has been under pressure over the last few months as rising interest rates have weighed on the industry. BCE has lost around 20% of its stock value compared to its 52-week high. The sell-off has dragged its valuation down, with the company trading at an attractive NTM (next 12 months) price-to-earnings multiple of 17.3. Besides, the company has raised its dividend at an annualized rate of over 5% for 15 previous years, with its forward yield at 7.07%.
Further, BCE is expanding its 5G, 5G+, and broadband infrastructure to increase its customer base and boost its financials. Considering all these factors, I expect BCE to perform well in this volatile environment.