Better Stock to Buy Now: Canadian Tire or Dollarama?

There’s no question Dollarama has been a much better stock investment. However, its valuation is quite high at the moment.

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Canadian Tire (TSX:CTC.A) is an iconic brand with a history going as far back as 1922 in Canada. Fast forward to today, other than Canadian Tire, its umbrella of banners includes SportChek, Mark’s (for casual clothing and workwear), Party City (the one-stop shop for life’s celebrations), Helly Hansen, Atmosphere (for outdoor adventures), Sports Experts, Pro Hockey Life, Trio Hockey, PartSource (for automotive parts), and Gas+ (a gasoline retailer). Canadian Tire also holds a 68% equity stake in CT REIT.

Yahoo Finance categorizes Canadian Tire as a specialty retailer in the consumer cyclical sector. This means its earnings can be impacted by the ups and downs of the economic cycle. Indeed, during the global financial crisis, the retailer witnessed its diluted earnings per share (EPS) falling 10% in 2008. The weakness persisted in 2019, with another decline of 11%.

After that, the company experienced a turnaround and a decades-long growth trend until the pandemic hit in 2020. From peak to trough of the pandemic year, the Canadian retail stock lost as much as 45% of its value! Interestingly, its diluted EPS only ended up falling 2% that year. So, the stock turned out to be super cheap. However, this was only obvious in hindsight.

Dollarama (TSX:DOL) is a discount store chain that was founded in 1992. It sets out to offer quality and value products to its customers at convenient locations. As a top consumer defensive stock, it has been delivering high-quality earnings. Its business performance is resilient even when the economy is gloomy because it sells a well-selected and diverse basket of low-price items.

In the last 10 fiscal years, it six times its diluted EPS, equating to an increase of 19.9% per year, which is incredible growth. Its strong growth is the primary driver of its superb stock performance, which grew investors’ money eight-fold in the period. For example, an initial investment of $10,000 turned into about $82,930. The same investment in Canadian Tire stock would only have delivered 5.7% per year. So, it goes to show that investing in Canadian Tire stock requires more attention from investors versus perhaps a buy-hold-and-add approach for Dollarama.

DOL Total Return Level Chart

DOL and CTC.A Total Return Level data by YCharts

Despite Dollarama stock’s exceptional long-term performance, it is not the best time to buy shares right now because, at the recent quotation of over $122 per share, the stock trades at a forward price-to-earnings ratio (P/E) of over 30, which is at the high-end of its historical trading range. Interested investors should look for a meaningful pullback in the growth stock for a better margin of safety.

Investors have much lower expectations from Canadian Tire stock, which trades at a reasonable P/E of about 13.2 times adjusted earnings. Analysts believe the consumer cyclical stock could potentially climb 11% over the next 12 months. Additionally, it also pays out a nice dividend yield of 4.9%. Its payout ratio is estimated to be approximately 61% of adjusted earnings this year.

In summary, Dollarama is a wonderful business, but the stock has appreciated substantially in a short time. Specifically, it has climbed 46% over the last 12 months and 130% over the last 36 months. The only bad thing about it seems to be its high valuation. Since Canadian Tire trades at a reasonable multiple and offers a safe dividend yielding almost 5%, it seems to be a better buy at the moment.

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 Kay Ng has positions in Canadian Tire, and Dollarama. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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