Market Overview
Volatility has returned! On Monday, June 8th the TSX Index entered overbought territory for the first time since late February. This also happened to coincide with the beginning of March’s correction.
In the days that followed, the TSX Index once again became highly volatile. This led to the highest single-day drop since March enroute to a weekly loss of 3.77%. This all but wiped out June’s strong start and the TSX Index closed with slight gains of 0.81% as of end of day on the 15th.
In comparison, our Bull List held up quite well and is sitting on gains of 2.99% as of mid-month.
Some of the more notable movers include Canada Goose (TSX:GOOS), Air Canada (TSX:AC) and recent bull list addition Polaris Infrastructure (TSX:PIF). They posted gains of 12.65%, 12.98% and 14.12% respectively.
Canada Goose reported quarterly results that were largely welcomed by the markets. It has since received a few upgrades and appears well positioned to weather the storm.
Of note, economic closures came at Canada Goose’s slowest period. In fact, the quarter accounted for only 7% of revenue in 2019. This means that it may not be as impacted as most retailers. Canada Goose has been a long standing Bull list stock here at Stocktrades Premium, and one we still have a lot of confidence in.
As for Air Canada – there isn’t much to say on this company aside from the fact it remains a trader’s dream. Nothing has changed fundamentally, and we are still a long way from returning to pre-pandemic air travel levels. One thing is clear, the company moves on any good economic news, and falls just as quickly if there are any bad headlines. It will remain one of the most volatile stocks over the next few months.
Finally, Polaris delivered strong quarterly results shortly after it was added to our Bull List. Despite solid gains, it remains attractively valued and is well positioned to deliver strong growth. It remains a triple threat in that it offers value, income and growth.
Kirkland Lake struggling, but still highly promising
In terms of stocks that are struggling, the lone standout is Kirkland Lake Gold (TSX:KL). The company lost 9.07% of its value in the first couple of weeks in June. This is not surprising as the price of gold has been pressure in light of positive economic activity.
That being said, the price of gold is likely to be sustained at these levels for quite some time. Given this, Kirkland Lake is likely to rebound and it has potential for outsized gains given today’s depressed prices. As a reminder, gold stocks with low debt, low costs and rising production will do well regardless of economic condition. Kirkland Lake fits this description.
In light of recent volatility, we are getting asked if a second crash is on its way. Truth is, no one can accurately predict when the next crash of 2020 will come – if it ever does.
All we do is ensure we invest in high quality companies that provide value, and have growth potential.
We believe in being in the market as opposed to timing the market. A well balanced strategy that includes averaging into the position during these volatile times will serve investors well over the long term.
*Mat Litalien is long Canada Goose. Dan Kent is long Canada Goose and Kirkland Lake Gold.
Consumer Defensive Stocks
Consumer defensive stocks are often thought of as critical components to an investors portfolio. Stocks classified as consumer defensive (or consumer staples) provide items necessary for everyday life. Think gasoline, food, toothpaste and even tobacco (even though not necessary.)
During times like these, consumer defensive stocks are even more important. We’ve witnessed a complete economic shutdown, one where only the absolute essentials are purchased as stores are forced to close and jobless numbers are skyrocketing at an unprecedented rate.
So how are these stocks doing during this pandemic? Are we seeing an outperformance?
For the most part, yes. The iShares S&P/TSX Capped Consumer Staples Index ETF (XST.TO) is down around 0.49% while the TSX is down 10.7%.
A popular consumer staple stock, and one that is not a major holding in XST is Dollarama (TSX:DOL). The company just posted first quarter fiscal 2021 earnings that generally hit the mark. However, the thing we were most interested in is how the company’s top and bottom lines were impacted by COVID-19.
- Employees were given a 10% wage increase
- Installation of plexiglass shields, distribution of PPE, installation of distancing markers, in store signage
- New cleaning protocols
- Support for employees if feeling unwell to avoid them coming into work
- Reduced opening hours so employees could stock shelves without customers
- All of these and more implemented in both retail stores and distribution warehouses
Overall, the company says these implementations cost them around $14 million, and $1 million in costs of goods sold. Keep in mind however that cost of goods sold does not include lost sales due to people purchasing less.
Dollarama stated that because a timeline for the end of COVID-19 is impossible to predict, guidance will be pulled for fiscal 2021.
Overall, we can expect many consumer staple stocks to report similar numbers and measures implemented
As we’ve stated numerous times before, it’s impossible to tell the true impacts of COVID-19 on companies until second quarter earnings have released. For example, Dollarama posted around $15 million in COVID-19 related expenses, however this was only for the last half of the quarter (or around 45 days.)
Now, can we expect these costs to continue? Yes and no.
Installation of safety measures are mainly a one-off charge unless the government decides to deploy stricter rules, and most stores have gone back to normal operating hours. To add to this, Loblaws recently announced it would be suspending its $2 wage bonus program moving forward.
However, we can expect cleaning protocols and PPE distributions to dig in to top and bottom lines until we see a vaccine, which is more than likely in 2021.
So what consumer staple stocks should you own?
Consumer staple stocks are actually a sector many beginning investors who are learning how to navigate the markets head to first. This is primarily due to the fact that lots of books preach the idea that you want to invest in companies that provide stable, increasing revenue.
You don’t have to look much further than our Foundational Stocks to know our two favorites, and ones who fit this description perfectly, are Alimentation Couche-Tard (ATD.B) and Loblaws (L).
In fact, Couche-Tard went as far as to raise its dividend in its most recent quarterly report. With the amount of dividends that are being cut right now, it’s a significant sign of strength when one is being increased.
How will they perform moving forward?
There’s no questioning the fact that consumer staple stocks are somewhat “boring”. People want high growth, and most staple stocks don’t provide that. However, they provide consistent growth, strong dividends and lower than average volatility, which are things that a lot of investors wish they had with their portfolios to put their minds at ease during the crash in March of 2020.
Lets look at the iShares Consumer Staples ETF (XST) we talked about at the start of the piece and compare its compound annual growth rates to the TSX Index.
TSX CAGR from 2012 to 2015: 2.63%
XST CAGR from 2012 to 2015: 24.47%
TSX CAGR from 2016 to now: 4.63%
XST CAGR from 2016 to now: 5.81%
And to some who will want to argue the fact that its outperformance from 2016 to now is primarily because of the sharp dip in the TSX during the 2020 market crash, it actually was outperforming prior to the crash as well.
TSX CAGR from 2016 until 2020 crash: 6.73%
XST CAGR from 2016 until 2020 crash: 7.23%
To add to all of this, while the TSX plunged 15.5% in the fourth quarter of 2018, XST lost just 8.3%.
Moving forward, we’d expect them to continue to outperform the index as revenue will be more consistent. In the situation of a potential second wave, we’d also expect these stocks to hold up better if the markets were to take a dive once more.
The moral of the story with this comparison and overview is the fact we believe every single investors portfolio should contain a reasonable allocation towards consumer staple stocks, whether it be individual picks or an ETF that tracks the best of the best like XST. You can focus on achieving outsized growth with the other portion of your portfolio, and when the markets fluctuate you’ll thank yourself.
