Desjardins Securities analyst Chris Li expects the “tug of war” between Canadian staples and discretionary stocks to continue in 2023 with “defensives (ATD, DOL and grocers) likely continuing to outperform at the start.”
“While the risk/reward for discretionary seems favourable, we believe better macro visibility is needed to attract incremental interest,” he said.
“Desjardins Economics’ outlook for next year calls for a short and shallow recession, albeit one that could stretch into 3Q, with risks tilted to the downside as households face higher mortgage-servicing costs. Against the backdrop of high inflation, rising borrowing costs, ongoing geopolitical uncertainty and contracting consumer demand, we expect defensives (ATD, DOL and grocers) to continue to outperform in the near term, supported by good earnings visibility.”
In a research report released Friday previewing the next year, Mr. Li said “clear winners are once again difficult to identify,” seeing staples as “well priced” and discretionaries lacking catalysts. However, he named Alimentation Couche-Tard Inc. his “top pick” for 2023, citing its “‘all-season’ attributes and reasonable valuation.”
“Our top pick view is based on: (1) sustainable solid c-store trends driven by multiple initiatives (eg Fresh Food, Fast, localized pricing/promo/assortment, new loyalty program) and moderating inflation/higher traffic; (2) funds flow to staples that will benefit from an improvement in macro conditions; and (3) upside to FCF from fuel margins remaining elevated and value creation from a strong balance sheet (acquisitions and/or share buybacks). We believe the valuation is reasonable at 16.3 times forward P/E (vs the long-term average of 17.5 times),” he said
He increased his target for Couche-Tard shares to $72 from $69, maintaining a “buy” rating. The average on the Street is $70.25.