One of the most diversified retailers in Canada, Loblaw Companies (TSX: L) is a stock many investors continue to look at for growth. Indeed, looking at the company’s stock chart below, it’s clear this defensive name is more of a growth stock, with the company having navigated the economy’s waves of optimism and despair well in recent years.
Now, the question is whether Loblaw’s future chart will look similar to the five-year picture we see above. Let’s dive into where this stock could be headed over the next one, three, and five years from now.
Source: Getty Images
Near-term outlook
Over the next year, I’d anticipate much of the recent momentum behind Loblaw to continue. The company’s core grocery and pharmacy business witnessed steady demand even during inflationary times. Cost controls and investment in digital platforms are a few strategic initiatives that allowed it to maintain solid financial performance.
Despite the pressure of increasing costs and more intense competition, Loblaw’s stable growth in earnings has supported its stock performance. Hence, Loblaw’s stock saw modest growth this year, which explains why this stock is an attractive option for conservative investors preferring stability in today’s market environment during instability.
Strong growth likely to continue
The medium-term outlook for Loblaw remains bullish, though I’d say there are heightened risks over this time frame. For one, the company will need to continue to provide strong earnings growth, which could be impacted by consumer spending pressures. Given the higher absolute level of prices for necessities, the question is whether the Canadian consumer can continue to afford higher prices brought on by inflation. And while Loblaw has been able to see earnings growth as prices rose considerably, its ability to provide increased efficiencies and innovation may be muted by pressures to return capital to shareholders.
We’ll have to see if the company can maintain its high capital spending levels while also reinvesting in its business and providing growth via consolidation over time. I’m unsure whether the growth we’ve seen over the past three and five years can be duplicated over the near term, but this is a stock that could warrant holding at current levels for those who bought a while ago.
Bottom line
Loblaw remains a top defensive option for investors, which is one of the key reasons why I think this stock has outperformed so many on the TSX in recent years. Again, my optimism for this particular name is much more centred on the company’s likely near-term performance. Over the medium term, I’d be much more skeptical of holding this stock, which trades at nearly 20 times forward earnings.
It’s entirely possible Loblaw stock could provide similar growth over the coming years, but I’m not banking on it. Personally, I think this stock is a hold at present, and I’d be looking to sell at any sort of forward multiple exceeding 20 times moving forward.
