In some cases this is true...
Major Canadian grocery stocks will often perform in both poor and strong economies due to the fact companies employ a low margin, high volume strategy.
This allows the retailer to lower costs and outperform smaller food companies.
Remember when you were first learning how to invest in stocks and people would tell you to "invest in what you know." Food and grocery stocks fall under this category, and as such are extremely popular.
But, don't get the wrong impression about food stocks here in Canada. There are some that can give Canadian investors extremely valuable growth.
In this article we're going to be going over 3 Canadian stocks that focus on food and grocery that investors need to be looking at. Each food and beverage stock will bring something different to the table, (no pun intended).
What are the best grocery stocks to own right now?
- Loblaws (TSE:L)
- Metro (TSE:MRU)
- Premium Brand Holdings (TSE:PBH)
Loblaws (TSX:L) is one of Canada's iconic brands. It is a holding company and a segment of George Weston that operates in a wide variety of industries. From grocery stores to financing services, the company provides a wide variety of products to Canadian consumers.
Loblaws owns more than 2400 stores, and the food and beverage company's ability to survive during practically any economic condition can be attributed to extremely strong brands, both premium and discount related.
There are a lot of investors who are bearish on brick and mortar retail stores right now, especially with the emergence of Amazon. However, Loblaws is doing well to counter this, as it is currently delivering strong e-commerce growth.
Those who want proof of Loblaw's ability to thrive during economic downturns should look no further than the 2008 financial crisis and COVID-19 pandemic. The stock fell from the high $30's to $23 during the peak of the 08 crisis, but had returned to pre-crash levels within a couple years. In the case of COVID-19, the stock actually increased in price, due to panic buying.
Moving forward, if we were to enter a recession, Loblaw likely has the largest "discount" factor and largest economic moat out of all major grocers. Most Canadians are on average 10km away from a Loblaw store, and during penny pinching situations you will likely see consumers head to stores like Superstore and No Frills over Sobeys, which is owned by Empire Company (TSE:EMP).
With a market cap of just shy of $40B, this is the largest grocer in the country and definitely a blue-chip option for those looking for a defensive stock. If you're looking for high income however, you may be disappointed with Loblaw. It only yields around 1.4%.
Metro Inc (TSE:MRU)
Metro Inc (TSX:MRU) is one of the largest grocery and pharmacy companies in Canada. The firm also acts as a distributor, leveraging its supply chain capabilities to service smaller neighborhood grocery stores. The majority of its operations are in Quebec, which houses over 70% of its owned and franchised food and drug outlets.
One key concept that often goes unnoticed with Metro is the fact the company owns the vast majority of its properties. This could allow the food and beverage giant to monetize via REIT conversion like other major retailers Loblaws and Canadian Tire have done with success.
The company has over 950 food stores and 650 drugstores. Consumers in the western part of Canada may be unaware of Metro however, as most of its stores are in eastern Canada.
The company is aggressively pursuing lower labor costs via self checkouts, and is adding new distribution centers to deliver a wider range of products with more efficiency.
Metro's yield of 1.4% isn't ground breaking, but considering its strong dividend growth streak we still like the company.
Not only does it provide a strong defensive position in times of economic uncertainty, but you can bank on the company paying you more in the form of a dividend every year.
Premium Brand Holdings (TSE:PBH)
Premium Brand Holdings (TSX:PBH) owns a range of specialty food manufacturing and food distribution businesses.
It has operations on both sides of the border with dozens of brands under management. The company's segments include Specialty Foods and Premium Food Distribution.
The Specialty Foods segment consists of its specialty food manufacturing businesses, which contributes about two-thirds of its revenue; the Premium Food Distribution segment consists of the company's distribution and wholesale businesses.
The company has grown from a small Canadian company to a North American conglomerate. It is also a Canadian Dividend Aristocrat, having raised dividends for 9 straight years. Although this isn't as long as our previous stock Metro, considering the growth of the company, we don't mind.
Premium Brands has been described as a serial acquirer, and since 2006, there isn't many years where the company hasn't made at least 2 acquisitions.
As such, the company's earnings have been increasing at a rapid pace. Premium Brand's net income has grown from $80M in 2017 to over $133M to close out 2021.
Analysts are not expecting this growth to slow anytime soon either. Many have double-digit revenue and earnings growth projected until 2025.
Now, these are just estimates and subject to change, however the company has shown it's capable of hitting these numbers in the past. So, we believe they could moving forward.
In the case of a downturn, you can expect Premium Brands to undergo significant volatility compared to our other Canadian food stocks on this list. In fact, we witnessed it during the bear market of 2022.
This is primarily due to the fact that Premium Brands doesn't have a strong discount brand presence, and as such consumers may head to cheaper variants like Loblaws.
This statement was definitely true during the COVID-19 crash back in March, when Premium Brands was hit very hard. The company lost over 37% of its stock price in just over a month.
We'd view this as a higher risk/higher reward option for those looking to buy a niche Canadian grocery stock.
Overall, exposure to the food and grocery sector here in Canada should result in lower volatility
There are plenty of other opportunities in regards to the food industry here in Canada. For example, you could look at GoodFood Market for exposure to food delivery and food boxes. Or you could take a peek at Alimentation Couche-Tard, one of the largest Canadian companies today, for exposure to convenience stores.
But with the ones on this list, particularly Metro and Loblaw, they should provide you with low beta options in times of economic uncertainty.