Consumer stocks that may be most vulnerable if commodities rebound

Funds continue to flow into Canadian consumer stocks as a result of macro events such as falling oil prices, but there will be a reversion to the mean trade at some point.

The catalysts and timing are difficult to determine, but Credit Suisse analyst David Hartley thinks it is useful to look at historical valuations in the sector to identify stocks that are relatively expensive and inexpensive.

Loblaw Cos. Ltd., George Weston Ltd. and Gildan Activewear Inc. are his top recommendations for investors seeking positions that will hold up beyond the current macro conditions, as all appear relatively inexpensive on a price-to-cash flow basis.

For example, Mr. Hartley believes Loblaw has yet to gain the market’s confidence given that its turnaround is far from complete, as is the integration of assets such as Shoppers Drug Mart.

The analyst believes Metro Inc. has the most potential downside in a pure reversion-to-the-mean trade on a P/CF basis. “In our view, the valuation is not sustainable without catalysts (which are not apparent now),” he said in a research note.

Mr. Hartley also highlighted Alimentation CoucheTard Inc., Canadian Tire Corp. Ltd. and Empire Co. Ltd. as relatively expensive on a P/CF basis.

He believes analyst forecasts for Couche-Tard look stretched, while Canadian Tire is benefiting from excessive REIT valuation assumptions by analysts.

He was also forced to downgrade Empire to neutral after the stock’s recent run-up.

“Confidence in oil/materials price reversal/stabilization is an obvious catalyst for fund flow reversal,” Mr. Hartley told clients, adding that earnings beats by Loblaw and misses by Alimentation Couche-Tard are further catalysts for these stocks.