Canaccord Canaccord Genuity analysts Derek Dley and Luke Hannan thinks it’s time for investors to “turn to offence” with consumer stocks.
“While concerns around a recession in early 2023 have become the consensus view, we believe this is reflected in a portion of our Consumer Discretionary names,” they said. “Furthermore, the narrative around bloated inventory levels was well addressed by our preferred names on the back of Q3/22 results, and we have begun to witness an easing of freight-related backlogs and costs, which should provide a tailwind to our Top Picks in 2023.
“With the Consumer Discretionary index trading in line with its historical average P/E ratio at 14.5 times, compared to the Consumer Staples index, which is trading at a historically wide premium to the broader S&P Composite index, we have become more constructive on the Consumer Discretionary names.”
In a research note titled Holiday Wishlist, the analysts said 2022 brought out the defensive attributes for many Consumer Staples companies in their coverage universe.
“With the challenging macro backdrop, spearheaded by a rapid increase in the interest rates across all developed economies, Consumer Staples was one of the few sectors to generate positive returns during the year,” they said. “Furthermore, as inflation reached 40-year highs in Canada, the consumer spending environment deteriorated, with many consumers feeling the pinch from higher mortgage costs, higher costs for groceries, and a jump in fuel prices.
“Amid this backdrop, the Canadian grocers generated strong performance throughout the year, as they were able to pass on record-high food price inflation to consumers, which led to robust same-store sales and overall top-line growth. Couche-Tard was another company which benefited from the defensive shift by many investors, capitalizing on what was a robust fuel margin environment and a pickup in merchandise sales growth within its convenience stores.”
For 2023, the analysts named three top picks. They are:
* Aritzia Inc. with a “buy” rating and $67 target. The average on the Street is $61.86.
They pointed to “strong brand momentum” on both sides of the border as the Vancouver-based company continues to build its U.S. retail network. They thinks EBITDA margins will “benefit from scale and normalization of freight” and see a “healthy balance sheet” with its shares trading below best-in-class retail peers.
* Alimentation Couche-Tard Inc. with a “buy” rating and $68 target. The average is $70.05.
The analysts think the Quebec-based retailer possesses a “structural advantage” from fuel margin strength and benefits from “steady” convenience store performance. They called its balance sheet “pristine” and providing “significant flexibility” with its shares having an “attractive valuation” given its organic growth profile and M&A potential.
* Uni-Select Inc. ) with a “buy” rating and $46 target. The average is $46.25.
The Boucherville, Que.-based automotive refinish and industrial paint company has “a history of outperformance in challenging economic backdrops,” they said, seeing it in the “early innings of driving operational excellence.” They see a balance sheet “primed for industry consolidation” and “attractive valuation considering defensive characteristics.”