Canadian investors should be happy that volatility has found its way back to the financial markets this October. Undoubtedly, we’ve all grown used to stocks rising regularly, putting up robust winning streaks, and surging by enough to inspire some of those market strategists to raise the bar on their price targets on the S&P 500 or the TSX Index. And while it feels good to continue being a net buyer of stocks on the way up, I’d encourage investors not to forget about one’s defences.
Indeed, playing defensive dividend stocks in the midst of one of the hottest booms in a while could limit capital gains potential if the bull market continues roaring loudly over the next three to five years. However, we must remember that a bear market is still possible, even when it feels like nothing can go wrong, with the AI revolution showing so much promise when it comes to the future of productivity.
Indeed, it’s hard to tell if there is a bubble forming or not. Undoubtedly, the broad market has become quite expensive, at least historically speaking. But, then again, when have businesses faced such a transformative productivity-enhancing tailwind driven by a profoundly powerful technology?
Indeed, the internet was one transformative technology, but I think it’d be unwise to deem that the AI boom will be exactly like the rise and fall of internet stocks way back in the year 2000. Even if you’re a believer in the AI boom and that things really are different this time around, it still makes sense to have a backup plan with a more defensively positioned part of one’s portfolio.
Loblaw
Loblaw (TSX:L) stands out as one of the best Canadian defensive stocks on the TSX. Shares of the $68.3 billion grocery juggernaut nearly doubled in the past year, as the firm seized growth opportunities to be had, as inflation and other consumer pressures incentivized saving money and trading down to generics (like No Name and Loblaw’s other low-cost brands). Loblaw isn’t just a well-run grocery retailer; it’s become a force to be reckoned with inside and out of the grocery store industry.
Whether we’re talking about President’s Choice Financial or Shoppers Drug Mart, Loblaw has evolved into a more diversified titan that’s outcompeted many domestic rivals on price, something I expect to continue as the firm invests opportunistically in technologies that stand to beef up its margins. Whether we’re talking about the modernization (or automation) of its distribution centres or the embrace of self-driving trucks (Loblaw recently announced an expansion in its Ontario fleet), I believe Loblaw has all the right tailwinds in place to keep its rally going strong over the next three years.
Sure, L stock isn’t cheap anymore at 28.4 times trailing price-to-earnings (P/E), but I’d still value it higher given how well it has executed and the technological catalysts that could make Loblaw a big margin gainer. In short, Loblaw is a retail winner that probably won’t be derailed come the next big market correction. With shares fluctuating wildly since the spring, I’d look to take advantage of any dips below the $55 per-share mark between now and year-end.
