While inflation appears to have moderated in the economy, its effects are still very apparent in most Canadians’ pocket books. You only need to go to the grocery store to be reminded of this painful effect. Inflation dilutes the value of our capital. As a result, it can be one of the most dangerous risks inside the economy
The good news is that Canadian investors can offset inflation’s impacts by investing in smart inflation hedges. Certain Canadian stocks actually benefit from inflation. By buying these stocks, you can help offset the value decline on your capital because they are growing at pace or faster than inflation.
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A garbage stock for inflation protection
The first inflation-beating stock is Waste Connections (TSX: WCN). Waste production around the world is expected to increase by 70% to 4 billion tons by 2050! As global populations rise and so does consumption, more waste is created. That requires a match in waste disposal.
With a market cap of $62 billion, it is the second largest waste provider in North America. It has a unique focus on smaller cities and secondary markets where it can acquire market-leading assets and operators.
This is a very defensive business given the consistency of demand. Likewise, once it has a landfill and an operating collection network, it is very hard for a new competitor to come and compete. As a consequence, Waste Connections has excellent pricing power. Its contracts allow for annual rate increase. It can defend its profit margins when its cost structure increases.
This Canadian stock has pulled back 11% in the past year. Its price-to-earnings ratio has reverted closer back to its mean, which may mean it’s a decent opportunity to add to the stock.
A retailer that’s a great inflation hedge
Dollarama (TSX: DOL) is another stock that can help you battle inflation. With 1,665 stores, it has grown to become the largest discount, value-priced retailer in Canada. It also operates a joint venture value retailer in Central America, and it just acquired an Australian discount retailer.
Dollarama is set apart from other discount retailers because it provides many brand name goods throughout its stores. While the prices seem attractive, it often is in smaller packages to earn superior margins when compared to other grocers and retailers.
Dollarama provides perceived value. Many consumers go there buying one item and come out with a basket full. It is able to quickly change prices if inflation is rising.
Given its exceptional execution and strong growth, this stock always trades with a quality premium. It is rarely cheap. However, this Canadian stock has recently pulled back. It could be a chance to nibble at a position.
A quality stock for any economy
Another great inflation beating stock is Constellation Software (TSX: CSU). It operates over 1,000 niche software businesses around the globe. These software businesses tend to have niche applications for a specific group of customers. They tend to be entrenched and highly critical to the businesses they serve.
Constellation does not always have the fanciest software, but it serves a purpose and customers rely on it for day-to-day business operations. Constellation uses a value-pricing model, so it is often able to raise prices aligned with inflation and its corresponding business expenses.
Some investors are worried about the effects of AI on its business. The stock has declined nearly 20% in the past six months. It’s a concern to monitor, but Constellation seems highly aware of the issue and very capable of adapting. Its stock price is attractive if those worries don’t bother you today.
