TORONTO – Bargain-hunters looking for value may want to consider investing in consumer stocks this year, as competition in the retail sector continues to intensify amid a lower loonie and more entrants vying for customers in an already crowded market, according to CIBC.
In a note Wednesday, CIBC equity analyst Perry Caicco said that while the bank (TSX:CM) generally recommends investors focus on either “high-growth companies or more traditional companies where management is actively driving value,” it sees long-term underlying value in retail and consumer stocks.
“As quarters unfold and as the challenges become apparent, (price/earnings) multiples are likely to decline,” Caicco wrote.
“But underneath it all, certain transition activities will begin to bear fruit and there could be some great bargains again among these stocks.”
The note points out that the consumer staples index on the Toronto Stock Exchange has risen 53 per cent in the past two years, while the consumer discretionary index has gone up 67 per cent, mainly due to mergers and acquisitions and a number of successful real estate spinoffs.
Caicco said the arrival of U.S. discounter Target changed the retail landscape in Canada, with other major players like Walmart and grocer Loblaws (TSX:L) expanding and diversifying to stay competitive.
He describes this year as one of “digesting and transition” as many of these companies deal with acquisitions, increase their square footage and shift strategies to attract consumers.
“Retailers are lapping a year of significant square footage growth and several got dented pretty badly. Even the multinationals like Walmart, Target and Lowe’s (especially Target) are not happy with their sales results,” he said.
Competition will only increase with retailers Nordstrom and Saks set to land in Canada this year, noted Caicco, adding that some companies, like those in the grocery business, as well as Tim Hortons (TSX:THI) and Rona (TSX:RON) might be at risk during any period of transition.
“We expect them (retailers) to be quite aggressive in the hunt for sales this year and everyone will have to respond or see revenues erode,” he said.
“This does not necessarily ease in the second half — we believe this battle will continue all year.”
This pressure could produce “unstable” earnings, which can result in share prices falling sharply, a trend seen with Loblaw late last year, Empire (TSX:EMP.A), Metro (TSX:MRU), Aimia (TSX:AIM), Rona and Dorel (TSX:DII.B).
But the “slightest stumble” in profits for these retailers could also mean a shopping opportunity for bargain-hungry investors, noted Caicco.