Picking the winners and losers in the Canadian consumer space

Canadian consumer stocks have been popular for investors looking for a safe haven amid weak commodity prices and economic uncertainty. But sector valuations have turned over since peaking in April — driven by greater confidence in both oil and materials — suggesting the consumer stock bubble may be deflating.

But there’s also been some divergence within the group. Credit Suisse analyst David Hartley noted that high-quality, organic cash-flow stories such as Metro Inc. and Dollarama Inc. continue to strengthen relative to their historical price-to-free-cashflow means. Meanwhile, stocks with roll-up strategies and other financial engineering-type stories, including Alimentation CoucheTard Inc., Saputo Inc., Canadian Tire Corp. Ltd., and Hudson’s Bay Co. have weakened.

Loblaw Cos. Ltd., its parent George Weston Ltd., Gildan Activewear Inc. and Dollarama are Hartley’s favourite names for investors seeking growth beyond the current market environment, as they all look relatively cheap on a price-to-cash-flow basis. “Loblaw and George Weston are slowly gaining the confidence of the market, in our view, as it navigates through the early-to-middle stages of its turnaround and/ or acquisition integration stories,” the analyst said in a note to clients.

For Gildan, Hartley believes its opportunity to grow will come from its ability to help boost profits for retailers of low-growth apparel. And for Dollarama, the analyst sees more room for new store expansion, new price points and higher revenue per visit, as well as a potential opportunity in Latin America that could help maintain the company’s current growth going forward.

Meanwhile, he thinks Metro has the most downside risk in a reversion-to-the-mean trade for the sector. The stock is trading well above its historical price-to-cash-flow mean, which he considers unsustainable without catalysts, which are not evident at the moment.