There aren’t all too many Canadian stocks I’d be willing to stash away in an account like a TFSA (Tax-Free Savings Account) and forget about for decades at a time. Indeed, regarding one’s TFSA, you should insist on the best-in-breed companies that can withstand rising competitive threats and all sorts of macro and industry headwinds.
Of course, not too many businesses fit the bill as having a moat wide enough to protect economic profits over the decades. That’s why it’s vital to stay informed about a business after you’ve bought shares because you never know when a disruptive innovation could tilt the tables in favour of another firm and whether such tech could erode the economic moat of an industry’s incumbent players.
In this piece, we’ll examine three Canadian growth plays that may be worth considering now. Their moats are wide enough with technological prowess that could keep them ahead of the pack.
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Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) made international headlines just over a week ago when it was announced that the Quebec-based convenience store operator and consolidator was going after 7-Eleven parent 7 & i Holdings in what would be a deal for the ages.
Such a deal would undoubtedly put the Canadian icon at the top of the global convenience store industry and keep its new chief executive officer (CEO), Alex Miller, very busy.
Of course, there have been more than a handful of skeptics who doubt a deal will ever happen (back in the day, Couche-Tard’s proposed acquisition of French grocery giant Carrefour fell through in record time). Buying foreign firms can prove difficult.
That said, Japan seems more open to the prospect of a foreign takeover in recent years. And just because France shot down a potential Carrefour deal doesn’t mean Japan will do the same, especially given the circumstances, which couldn’t be more different. Does that mean Japan will be quick to give a thumbs up to Couche-Tard? Probably not.
A 7-Eleven deal is a good thing if you’re in ATD stock for the long term!
In numerous prior pieces, I’ve noted that a 7-Eleven deal would be a good thing for long-term shareholders but that closing such a deal would take time due to the Japanese regulators that Couche-Tard would have to appease.
Investors seem to be bracing for the dilutive effects should such a deal happen. Additionally, Couche-Tard, a firm that boasts a pristine balance sheet for much of its history, will take quite the debt hit should it walk away with a massive US$31 billion 7 & i Holdings deal in hand.
Of course, heavy debt balances can be a red flag for some firms. That said, given the stability of cash flows and earnings within the convenience store market, I’d not treat any added debt as a concern.
Arguably, 7-Eleven is a gem that shines even brighter than Couche-Tard and Circle K. It’s a cash cow of a business. After doing nothing for three years before the Couche-Tard’s takeover offer, I think the Quebecois convenience store giant could walk away with an elephant-sized steal that may be worth raising debt and issuing more shares.
The bottom line
Whenever there’s an opportunity to swing your bat for a home run, you should take it. I believe Couche-Tard’s managers have been waiting patiently for the perfect time (and price) to pounce on a colossus of a deal. Should no deal happen, look for ATD stock to regain the 9% it lost last week as investor fears over dilution and debt fade quickly.
However, if Couche-Tard proceeds with the deal (regulatory proceedings could span months or years), ATD could continue sinking in the near term. Any such weakness has to be viewed as an opportunity, however, as Couche-Tard’s moat will be a heck of a lot wider with 7-Eleven’s assets thrown into the mix!
