Are you looking for quality stocks to buy on the dip?
There aren’t many around these days. The stock market has been running hot for almost two years now as stocks have recovered from the rate-hiking selloff observed in 2022. Interest rate hikes decrease the value of stocks and other assets. When the U.S. Fed and Bank of Canada hiked rates two years ago, stocks predictably sold off.
However, in November of 2022, ChatGPT launched and quickly rose to 100 million users. The hype surrounding generative artificial intelligence (AI) apps like ChatGPT ignited a rally in tech stocks that — for the most part — continues today.
That brings us to where we are now. Tech stocks are very expensive, while stocks in other sectors have risen to a lesser extent. Not much is cheap. However, there is one Canadian stock that is down in price by 10.5% this year, and that may be a buy at today’s prices. After rising more than 1,000% in the last 20 years, it may be a good “dip buy.”
In this article, I will explore the one TSX stock that went down 10.5%, which may be worth buying and holding forever.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is a Canadian gas station company. It owns the famous Circle K chain, along with other chains in the U.S. and Europe. The company started off as a small convenience store chain (Couche-Tard) in Quebec and later acquired other companies to build its presence in English Canada, the U.S., and Europe.
Alimentation Couche-Tard stock is famed for its excellent compounding track record. Its stock has risen 1,296% since March of 2012. Over the last 10 years, its revenue, earnings and free cash flows (FCF) have risen at the following compounded annual (CAGR) rates:
- Revenue: 6.2%
- Earnings: 14.7%
- FCF: 12.81%
This is pretty strong growth. The question is, “How has Alimentation managed to pull this off when it is in a traditional industry with little innovation to fuel growth?”
The answer is that it has done so through a smart expansion strategy.
Alimentation Couche-Tard’s smart acquisition strategy
One of the reasons why ATD has grown so quickly is because it has re-invested its profits into its business rather than paying dividends. The company’s payout ratio is only 15%, which means that it can afford to re-invest 85% of its profits back into itself. The result of this has been the company buying up other convenience store chains without having to borrow too much money to do it. Another consequence has been a very low dividend yield, but — let’s be honest — when a stock rises 1,000%, you don’t think about the dividend that much.
Foolish takeaway
There aren’t many opportunities to buy stocks on the dip these days. But every now and then, you find them. Alimentation Couche-Tard stock is down because the company’s fuel sales dipped slightly last quarter. However, oil prices are again rising, and top investors like Warren Buffett think they will be pretty healthy long term. I’d say an investment in ATD will do pretty well if the company sticks to its traditional approach.
