With broad market volatility picking up in the past week, it certainly feels like there’s a bit of a rotation going on beneath the surface of the TSX Index and the S&P 500. Undoubtedly, growth-to-value rotations can be tough to catch, but for long-term investors looking for deals, I do think that it can make sense to consider the neglected names, even if it means getting caught with a lack of gains over the near- to medium-term. Indeed, timing your entry can be tough, but if you’ve got the time horizon and a fat dividend to collect every quarter, perhaps getting in right ahead of a surge matters less than just being invested.
In this piece, we’ll have a look at two names that could be great bets before the next shift, whether that’s within the next month or the next year or two. Given the heat in the growth trade, this piece will look at some of the modestly valued names that I think could be a source of decent risk-adjusted returns over the next three to four years.
Source: Getty Images
Alimentation Couche-Tard
First up, we have Alimentation Couche-Tard (TSX: ATD), a convenience retailer that’s been stuck on the ground for the past year and a half. More recently, shares spiked to hit two-year highs just shy of $85 per share. Whether the latest spike leads to a sustained breakout and the start of a new multi-year leg higher, though, remains the big question. I think the stock still looks dirt-cheap at 20.9 times trailing price-to-earnings (P/E), given the low-tech earnings growth that could be on the horizon in the next few quarters.
Undoubtedly, the war in Iran has made ATD stock that much choppier so far this year. But, beyond that, there’s a lot to love about the path forward as Couche-Tard looks to put its extra liquidity to work. If there’s no blockbuster deal in the cards, perhaps a mix of smaller deals, more buybacks, dividend raises, and organic moves could be the answer. Either way, I find ATD stock to be an underappreciated sleeping giant that might be worth a second look after last month’s newfound momentum (up 8% in a month).
Loblaw
Loblaw (TSX: L) is another quiet consumer staple stock that suddenly caught a bid higher in the past month, now up over 11% over the timespan. Undoubtedly, like Couche-Tard, Loblaw’s breakout has been a long time coming, and while only time will tell if the latest spike will lead to fresh highs, I do think that the name is incredibly well-positioned as Canadian inflation creeps even higher after settling at a level that’s already hotter than historical averages.
Food prices are high, and nothing about that is likely to change in the near future. Food inflation has been hovering north of 3% of late. And it feels like 4–6% could be next as higher energy prices weigh heavily. Add to the pressures Canadians are feeling elsewhere, and there’s no question that discount retail is where the opportunity may lie.
As Loblaw triples down on discount banners and private labels, I think the market might be missing the share-taking potential in the second half. It’s not just about below-average costs on groceries, though. Loblaw is looking for value for money, and that also means delivering on quality. In that regard, I feel Loblaw has made big strides in recent years.
In any case, Canadian consumers need more ways to beat inflation, and with that, Loblaw is equipped to keep expanding its presence in a way that justifies the 30.1 times trailing P/E multiple.
