Canadian Tire Stock Is Getting Ridiculously Oversold

Canadian Tire (TSX:CTC.A) is a deeply discounted dividend stock that could roar as inflation and rates tank from here.

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Canadian retailers have taken endless shots to the chin over the past three years. Undoubtedly, inflation remains the top enemy of discretionary retailers, consumers, and just about everybody. With Canada’s inflation number falling to 2.7% for the month of June, it certainly seems like those endless price increases are about to become a heck of a lot less noticeable.

As inflation inches ever so closer to that desired 2% level, with certain goods experiencing deflationary pressures (negative inflation), perhaps it’s not too far-fetched to think another two interest rate cuts will be in for 2024. Of course, some hawks believe we won’t get another rate reduction until next year. However, if inflation keeps playing ball (and it has of late), I’d argue there’s a good chance that rates could fall like a rock from here.

The big question, however, is whether we’re going to witness those early pandemic levels of rates. Indeed, the stock market (especially small- and mid-cap names, which have heated up in recent trading sessions) may add to its robust rally.

With the TSX Index recently surging to hit new all-time highs, investors who are on the sidelines may wish to get into some of the less-loved discretionary retail plays while they’re still cheap because they may not stay cheap forever, especially as rates and inflation feel gravity for a change. Indeed, lower rates and inflation could be a double shot in the arm of the consumer.

Lower inflation and rates could spell good news for discretionaries

On the one hand, consumers will feel less burdened by their outstanding debts. That shores up more cash for those nice-to-have kinds of goods. Additionally, borrowing more to buy certain big-ticket discretionaries makes more sense in a lower-rate climate.

Further, lower inflation (and perhaps a bit of deflation on certain items) could feed the appetite for bargains again. Indeed, discount retailers and off-price stores have been faring incredibly well in recent years as shoppers look to go to great lengths to avoid those awful price increases.

Finally, lower rates and inflation are good news for the economy and investor sentiment as a whole. With early signs suggesting a resilient consumer, perhaps discretionary plays like Canadian Tire (TSX:CTC.A) are worth stashing in your shopping cart this July.

Canadian Tire: The ultimate value stock in this environment?

Canadian Tire is a mid-cap ($8.1 billion market cap) retailer that’s been hurting since peaking way back in 2021. The stock is down around 33% from those heights, with a dividend yield of 5.1%. Undoubtedly, management noted the challenges facing consumers. But these challenges, I believe, could fade fast as rates and inflation keep falling.

The big question is whether 2% (or maybe a bit lower) inflation and markedly lower rates could spark a spending spree for those discretionary goods consumers have held off on buying over these past few inflationary years. Canadian Tire could be a massive beneficiary of pent-up demand for various big-ticket goods once rates and inflation become a thing of the past.

At 11.55 times forward price to earnings, CTC.A stock looks like a dirt-cheap dividend stock in the bargain bin.

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 a disclosure policy.

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