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Canadian Stocks to Buy
Canadian stocks are supposed to play catch-up in 2021 after being flat in 2020. Tech stocks propelled American stocks last year and though homegrown names like Shopify and Lightspeed have performed admirably and became top Canadian stocks to buy, the TSX didn’t break 18,000 last year. Instead, it watched the big Wall Street indices shatter record after record.
This year should be different. The belated recovery, earmarked for the second half of 2021, and China’s bounce-back means that natural resources including oil, will see a comeback while more economic activity and current high house prices always benefit the banks. Already, the Biden Blue Wave has lifted homegrown cannabis names across the board, such as Canoppy and Aphria, and green energy like Boralex and Northland Power.
This week we look at Canuck stocks:
Alimentation Couche-Tard (ATD.B-T)
ATD stock stumbled recently after the French government blocked ATD’s takeover of French supermarket chain, Carrefour. It’s significant, because Alimentation is a grow-by-buying story. Canadian investors have long praised ATD. The stock’s five-year return stands at 34.46% and 25.75% at three years. However, in the past 12 months ATD stock has lagged the TSX, posting a -11.35% total return, -8.25% revenue growth YOY, and share performance around 11% YOY. Alimentation stock has yet to return to pre-Covid levels. Lockdowns have reduced the number of cars filling up at gas stations, which is ATD’s bread and butter. Then, there are open questions about how ATD will adjust to the electric vehicle future which is growing more inevitable every day. Given all these forces, is this a bump in the road for Alimentation or will it recover?
The company is still making money and has handily beaten its last four quarters, despite lockdowns. The problem is a what-have-you-done-for-me-lately lack of acquisitions to drive growth. To address the rise of EV’s, Alimentation will add charging stations to the North American west coast and Quebec, based on its trial success in Norway. In time, the company will expand those stations across North America. So, EV’s are not a worry. As for lockdowns, the eventual herd immunity that mass vaccinations will create will put more cars back on the road, including commuters to offices that will re-open. (Personally, I find predictions that workers will abandon offices overdone. Their bosses will demand their workers to come back.)
So, where does that leave ATD shares? The current pullback is a buying opportunity, but the eventual payoff may not happen until later this year. Then again, it can change on a dime with a smart acquisition. Existing shareholders can buy on weakness, and new ones can partially buy now and see what happens.
Aritzia (ATZ-T)
By any measure, Aritzia is a retail winner and Canadian success story. Covid has brutally separated retailers into winners and losers, and the reason boils down to e-commerce. Aritzia sells a lot of clothes online, undeterred by lockdowns. Their brand has captured the Instagram generation who proudly flaunt the company’s fashions in social media. It helps that Aritzia’s clothes are affordable, not elitist, and attracts buyers across generations. That’s why the Aritzia stock is now trading at all-time highs, exceeding pre-Covid levels and making it a top Canadian stock to buy.
It released its Q3, ending Nov. 20, 2020 two weeks ago, and the numbers were good. Net revenue increased 4.1%, but e-commerce revs soared 78.5%. Despite persistent lockdowns, shops that reopened in 2020 still averaged 81% of last year’s productivity.
Eventually, vaccines will reopen the company’s 96 stores across North America (two-thirds in Canada). This can only boost revenues across the board. Of course, current lockdowns especially across Canada will dent sales, but e-commerce will sustain the company through this rough patch.
However, something to flag is its rising PE. On Valentine’s Day 2020, ATZ was trading at 33.02x. Since then, the PE has climbed like an escalator to around 130x. To compare, Lululemons stands at 77x and Canada Goose at 61x. Investors are willing to tolerate a high valuation, because they see strong growth driven by expansion in the U.S. in coming years. Plans are afoot to add five or six new stores this year. The company boasts a consistent history of revenue growth and there’s no reason to doubt this will end soon. Net revenue was $153 million in 2018, $981 million in 2020, and rose each year in between. Stockchase’s research department expects EPS to increase five-fold.
Outlook should be long term, but investors should keep an eye on the PE. This stock definitely has momentum and seldom dips. However, the wider market has run-up and is frothy. Aritzia is a partial buy, but watch for pullbacks.
Savaria (SIS-T)
Savaria is a smaller-cap stock worth $890 million. Frankly, SIS stock hadn’t been doing much in recent years apart from paying a consistent dividend (currently 2.86%) and growing modestly by acquisition. Then, last week Savaria offered to buy Sweden’s Handicare for $521.1 million. Like Savaria, Handicare makes lifts in the homes of seniors. For the fiscal year ending December 31, 2020, Handicare reported sales of 205 million euros ($317 million). This deal will boost Savaria’s revenues 50% to $671 million, says the company, with an adjusted EBITDA of $96 million. It would also expand Savaria’s reach to the U.K. and Holland and bolster its presence in the U.S. and China. The SIS stock jumped over 9% on the news.
Demographics are in Savaria’s favour as baby boomers age, but Covid is another tailwind. Sadly, 75% of Canadian Covid deaths in 2020 took place in nursing homes. This has prompted seniors to upgrade their existing home than move into a long-term care facility. Governments are encouraging this, for example Ontario whose Seniors’ Home Safety Tax Credit will cover up to $2,500 when spending on a lift or wheelchair ramp. Compare that one-time spend to the $3,364 average cost of a seniors’ residence in B.C. Investors also avoid the lawsuits facing retirement homes, yet are playing aging demographics.
Outlook: long-term, like three to five years. Buy.
(Disclosure: I own shares of Savaria.)
