Loblaw Companies Ltd (L.TO)

In the consumer staples space in Canada and the US, we are seeing some weakness. He sees money moving from defensive types of names into more cyclicals. The company had some very good earnings earlier this week, and the stock has moved up towards its 200-day moving average, but if you look at how the stock has performed over the last year, that moving average has really been flat, a bit of a warning sign. Trading at about 17X earnings with not that high of a growth rate.

It is one of the slower ones when it comes to being disrupted by Amazon and the like. See his Top Picks today.

The stock pulled back to about $65 because of concerns on food inflation. Competition in food retail has really moderated in the last few years. Also, their Shoppers holdings is an attractive sector given the demographics. They are the largest in both those spaces. Achieved the synergies they indicated when they bought Shoppers. Loblaw’s went through a whole refurbishment program, and we are starting to see the benefits of the new operating and computer systems they put in. There is going to be some cross-selling between the 2 stores. Shoppers have indicated they want to be a distributor of medicinal marijuana, which makes a lot of sense. They are reporting before 9 AM tomorrow, so see what is said before jumping in.

Owns very little, and only in special accounts. It has a fairly stable, mature business. They have already kind of spun out their real estate, and pulled that financial engineering trick. The Shoppers acquisition was good and has performed for them, but the business only has a dividend yield of 1%-2%. For him, if he wants a total 8% return, so how is he going to get that other 6%-7%?

Model price is $65.61. He would not buy it here. Buy it at $51, EBV +2. Valuations are too high. He sees earnings coming down.

This has retreated from around $72 to $64. This is the premier grocery chain in Canada, but we have seen all the grocery chains pulling back in price. One problem is the inability to pass on price increases to the consumer. The consumer is becoming very, very sticky in terms of price, and are moving more and more to lower discount stores, so margins are being compressed. This could go on for some time. Currently this trades at around 2X Book. He would look at this at $60.

MRU-T vs. L-T. Neither one are favourite because of the competition. COST-Q is opening more stores. Wal-Mart is here with food as well. You are starting to get some food inflation which they are having trouble passing on to consumers. L-T has Shoppers and so he prefers it. He is not particularly thrilled with it either one, however. You would have to wait for Empire’s acquisition of Safeway to be fixed to consider it.

One of the most well respected brands in Canada. They do a great job marketing their products and seem to have a good sense of what the Canadian consumer wants in terms of healthier food choices. He would wait for a little lower entry point; 7%-8% cheaper.

Analysts are looking at $80 and most recent updates involve $70-$80. It is not expensive. The lows during the next two years have to hold or we have a major top developing. We are getting a pullback for some unknown reason and you could buy into it.

He likes this very much. The stock is down, and if you own, you may want to consider averaging down. It is a great name, especially with the combination of Shoppers Drug. A great, long term hold.

Food inflation is not the driver it was. US food stocks have had a hard time. To get sales going, they have to do a lot more promotion. Feels this is at a level that you can buy at. He is seeing about 12% EPS from 2015 to the end of 2017. Shoppers Drugs has been very impressive. Just bought an electrical medical records company which should help them manage their customers. The is trading below its 5-year average.

He wouldn’t worry about the possibility that this might go down. They have revamped operations pretty successfully. People still need to shop, and this has a wide enough offering to actually get some people going in. If it marks time for the next year or so, he wouldn’t worry too much.

He was Long this for many years through the food inflation craze. Recently he Shorted the stock. (Not a screaming short, but just trying to lower the volatility in his portfolio.) Thinks over the next 6 months it will have very little beta to the upside, but have some downside. They now have food deflation which is tough on margins. Also, Walmart keeps lowering prices in Canada, Costco has opened 60 distribution centres, Amazon is testing a new product in the US where you order online, drive through and pick up your food.

In 2016 they have done well in Western Canada. They did well with the private label of Safeway. We are starting to see food deflation and the reports are causing volatility. If he had to own only one food retailer in Canada it would be this one.

(Top Pick Nov 25/16, Down 4.82%) Food deflation is the headwind. They are different than traditional food grocers because they have Shoppers Drug Mart. They now have about a 30% share in food retail as well as in drug retail. They still have a lot of room to improve their margins. This is an attractive entry point to buy this one.