Canadian investors can be happy that volatility has returned to the financial markets in October. No doubt we’ve all become accustomed to stocks rising regularly, posting robust winning streaks, and rising enough to inspire some of those market strategists to raise the bar on their stock market price targets. S&P500 or the TSX Index. And while it’s a good feeling to remain a net buyer of stocks as the price rises, I would encourage investors not to forget their defense mechanisms.
Playing defensive dividend stocks in the midst of one of the biggest booms in a while could limit the potential for capital gains if the bull market continues to roar loudly over the next three to five years. However, we must remember that a bear market is still possible even when it seems like nothing can go wrong, with the AI revolution showing so much promise when it comes to the future of productivity.
Indeed, it is difficult to say whether a bubble is forming or not. Undoubtedly, the broad market has become quite expensive, at least historically. But then again, when have companies faced such a transformative, productivity-enhancing tailwind, powered by an extremely powerful technology?
The Internet was indeed a transformative technology, but I think it would be unwise to think that the AI boom will be exactly like the rise and fall of Internet stocks in the year 2000. Even if you believe in the AI boom and that things are truly different this time, it still makes sense to have a backup plan with a more defensively positioned part of your portfolio.
Loblaw
Loblaw (TSX:L) stands out as one of the top Canadian defensive stocks on the TSX. Shares of the $68.3 billion supermarket giant have nearly doubled in the past year as the company seized growth opportunities that presented themselves while inflation and other consumer pressures encouraged saving money and a move toward generics (such as No Name and Loblaw’s other low-cost brands). Loblaw is not just a well-run supermarket chain; it has become a force to be reckoned with, both within and beyond the supermarket sector.
Whether we’re talking President’s Choice Financial or Shoppers Drug Mart, Loblaw has evolved into a more diversified titan that has surpassed many domestic rivals on price, something I expect will continue as the company opportunistically invests in technologies that can boost margins. Whether we’re talking about modernizing (or automating) its distribution centers or embracing self-driving trucks (Loblaw recently announced an expansion of its Ontario fleet), I believe Loblaw has the right tailwinds to keep its rally strong over the next three years.
Sure, L stock isn’t cheap anymore with a price-to-earnings ratio of 28.4 times, but I’d still rate it higher given how well it has performed and the technology catalysts that could make Loblaw a big margin gainer. In short, Loblaw is a retail winner that is unlikely to be derailed by the next major market correction. Since the stock has fluctuated wildly since the spring, I would look to take advantage of any dips below the $55 per share mark between now and the end of the year.
#defensive #growth #stock #buying