Buy This, Not That: Retail Stocks Edition

Investors may wish to consider Canadian Tire (TSX:CTC.A) and another retail stock moving forward.

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With the U.S. Federal Reserve (the Fed) pointing to a potential trio of interest rate cuts for the year, questions linger as to what the Bank of Canada’s move will be. Indeed, I think the cuts may also be looming, especially as inflation comes under further control. Undoubtedly, it would be nice if the consumer price index (CPI) were to fall closer to that sought-after 2% level before slashing rates. Regardless, it seems like Canadian investors no longer have to battle with central banks.

As rates decline and consumers look to pick up where they left off, it’s the retail players that could really stand to benefit over the next 18 months. Indeed, for many, the rate cuts couldn’t arrive soon enough. In any case, investors looking to play the long haul may wish to nibble away at top-tier retailers sooner rather than later, while expectations remain quite modest, with valuations that are a tad on the undervalued side.

Not all retailers are poised to thrive in this new falling-rate climate, though. Though lower rates may be viewed as a tide that lifts many boats, not all boats will be able to rise until they get past their own unique slate of issues. And in this piece, we’ll look at one TSX retail stock that I wouldn’t look to buy at this juncture. Though I wouldn’t short it, I would just steer clear for now, at least until more evidence grows that the tides can turn.

Without further ado, let’s check in with the following plays.

Buy this: Canadian Tire

First up, we have Canadian Tire (TSX:CTC.A), an iconic discretionary retailer that also has a pretty intriguing financial business and loyalty program. The firm behind the flagship Canadian Tire stores, as well as Mark’s and Sport Chek, stands to profit as consumers move past the pinch of inflationary pressures. And with lower rates on the horizon, perhaps indebted consumers may have a bit more flexibility at some point down the road, as they pay just a bit less interest on their loans or mortgages.

In any case, I view CTC.A stock as a terrific value option to play a consumer comeback. Of all the retailers, Canadian Tire may actually be the most underrated. At writing, shares boast a juicy 5.3% dividend yield after sliding more than 36% from its 2021 highs. I think the selloff is overdone following another less-than-ideal quarter for the firm.

Not that: Dollarama

Dollarama (TSX:DOL) stock has been faring incredibly well, now up around 52% over the past two years alone. Inflationary pressures and macro headwinds have pushed consumers to lower-cost retailers in an effort to save a few bucks. As consumers heal and the weight of high rates is gradually lifted, I think Canadians could find themselves trading up to pricier grocers as costs become somewhat less of an issue.

I’m still a big fan of the company, its expansion plan, and the great deals it offers consumers in these trying times. Still, the climate and valuation are reasons to take a rain check on DOL stock, in my humble opinion. At 31.7 times trailing price to earnings, the stock isn’t the same bargain it used to be, and if the worst of inflation is over, I’m unsure as to whether we’ll see high foot traffic and full baskets.

In short, great retailer. But a tad out of my price range as a value hunter. Should shares pull back to the $80-85 range, I’d be more interested in nibbling a few shares of the well-run discount retailer.

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 Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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