TFSA investors who’ve yet to invest their 2021 contribution missed out on some pretty sizeable gains, with the TSX Index and S&P 500 both soaring around 15% year to date. Those waiting around for a correction could be waiting for a very long time, as it appears investors have mostly shrugged off the recent inflation data.
With the U.S. 10-year Treasury yield pulling back below the 1.5% mark, it seems as though investors are finally putting their trust in the Fed. Chairman Jerome Powell saved this market back in the depths of March 2020. And he’ll probably make the right call once again, as he finds ways to taper without having to spook investors with rate hikes.
Although I’m not a fan of chasing market rallies, I think those hoarding cash could miss out on further gains going into year’s end, once the economy really has a chance to reopen.
Despite the froth on the TSX, I think there’s still ample value to be had in the growthy areas of the market, which could make up for lost time, as investors come to terms with what appears to be a transitory bout of inflation.
Good food, bad stock?
Consider Goodfood Market (TSX:FOOD), a Canadian meal-kit delivery service provider that’s fallen drastically out of favour over the past few months. The company received an unprecedented boost amid COVID-19 lockdowns. As Canada winds down from its third wave and restrictions are gradually lifted across provinces in phases, we’re going to see many subscribers hit the “cancel” button in favour of grocery stores.
Once the economy fully reopens, we’re going to witness the substitution effect in full force. And Goodfood is going to feel it far more than most other service providers. As COVID-19 cases wither away and more people get the jab, weekly grocery hauls will no longer seem like a risky chore. And just like that, Goodfood will lose one of its biggest competitive edges.
Lockdown stocks take a hit
With shares of the name now off around 47% from their 2021 highs, though, I think the bar is set low going into the latter quarters of the year. Moreover, I think investors may be discounting the possibility of a fourth major wave of COVID-19 in Canada. If the nation reopens too soon, the insidious “delta” variant could become dominant and spark a fourth round of lockdowns come September. And in such a scenario, it’s the “lockdown” stocks like Goodfood that could become great again through the eyes of investors.
Even if no fourth wave happens, I still think Goodfood is a great buy after its nasty pullback. The stock trades at just 1.6 times sales. Pretty cheap given its recent growth, even if it’s poised to decelerate at a double-digit percentage rate in the post-pandemic environment.
Although the company isn’t poised to make a sustained move into profitability anytime soon, I think the company is well positioned to take share in the Canadian meal-kit market, given its improving operating track record under its incredible founder and CEO Jonathan Ferarri.
Bottom line
Up ahead, Goodfood faces a tough environment. It’s not just the competition against grocers that’s worrisome; churn from other meal kit delivery firms is also a concern. There are no switching costs with meal kits, after all. In fact, one could argue that switching costs are negative, given the competition beckon previous subscribers with the promise of free meal kits for renewing.
With sights set on the economic reopening, cyclicals and reflation stocks have been surging at the expense of lockdown beneficiaries like Goodfood. I think the rotation is overdone and that there’s a lot to gain with Goodfood stock at these depths.
