Canadian equity markets have become volatile over the last few days as investors have become nervous about substantial stock gains. Despite the downturn, the S&P/TSX Composite Index is up 16.9% this year. Meanwhile, rising treasury yields and ongoing geopolitical tensions are causes of concern. So, I expect the equity markets to remain volatile in the near term.
Given the uncertain outlook, I favour defensive stocks with a tilt toward growth. These stocks would stabilize my portfolio while delivering healthy returns. Here are my two top picks.
Dollarama
Dollarama (TSX:DOL) is a Canadian discount retailer that has adopted a superior direct-sourcing platform, strengthening its bargaining power and lowering its intermediatory expenses. Thus, the company is able to offer a wide range of consumer products at attractive prices and enjoys healthy same-store sales, even during a challenging macro environment.
Dollarama has expanded its store network from 652 in fiscal 2011 to 1,583 by the end of the second quarter of fiscal 2025. These expansions and healthy same-store sales have boosted its top line and net income at an annualized rate of 11.5% and 18% for the previous fiscal 13 years. Continuing its uptrend, the company revenue and net income have increased by 8% and 17.9% in the first two quarters of this year. Supported by these solid financials, the company has delivered over 800% returns in the previous 10 years at a 24.7% CAGR (compound annual growth rate).
Meanwhile, Dollarama continues to expand its store network and hopes to increase it to 2,000 by the end of fiscal 2031. Given its efficient and profitable network growth, these expansions could boost its top and bottom lines. Further, the company possesses a 60.1% stake in a Latin American retailer, Dollarcity. Dollarama owns an option to increase its stake by 9.89% by the end of 2027. Moreover, Dollaricty has planned to increase its store count to 1,050 from 570 as of June 30, 2024. The store network expansion and increased stake could boost Dollarcity’s contribution towards Dollarama. So, Dollarama’s growth prospects look healthy.
Meanwhile, Dollarama’s valuation looks expensive, with its NTM (next-12-month) price-to-sales and NTM price-to-earnings multiples at 6.2 and 33.8, respectively. However, given its solid underlying business and healthy growth prospects, investors are ready to pay a premium.
Waste Connections
Waste Connections (TSX:WCN) is a waste management company operating in the United States and Canada. It collects, transfers, and disposes of solid wastes primarily in secondary and exclusive markets, thus facing lesser competition and enjoying higher operating margins. Earlier this month, the company reported an impressive third-quarter performance, with its top line and adjusted net income growing by 13.3% and 15.5%, respectively. Further, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) expanded by 120 basis points to 33.7%.
After posting its solid third-quarter performance, WCN has raised its 2024 guidance, with its revenue and adjusted EBITDA projected to grow 11% and 15.3%, respectively. Moreover, the management is hopeful that its innovative approaches to employee engagement and retention could also support its financial growth next year. The management expects its 2025 revenue to grow in the mid- to high single digits while its adjusted EBITDA could increase in the high single digits.
Considering its solid performances and healthy growth prospects, I am bullish on Waste Connections despite its expensive NTM price-to-earnings multiple of 34.2.
