2 TSX Grocery Stocks to Buy in 2022 in Case of Stagflation

Consumer staple stocks like grocers can provide excellent downside protection.

| More on:

When it comes to macroeconomic conditions, no scenario causes more worry for politicians, consumers, and businesses alike than the prospect of stagflation. Stagflation is a dangerous blend of both combination of stagnant economic growth plus higher-than-forecasted inflation.

With signs of job growth slowing down amid high fuel and food prices along with a red-hot real estate market, investors are understandably skittish when it comes to buying stocks. This comes at the heels of a recent interest rate hike, with more planned along the way as both the Fed and Bank of Canada adopt a more hawkish stance.

What can investors do?

A stagflationary environment wreaks havoc on most conventional investment portfolios, with previously high-performing growth stocks and even bonds expected to deliver muted or negative returns under such conditions. A better strategy is to pivot to the consumer staples sector.

This sector produces or sells staples that people must buy out of necessity regardless of economic conditions, such as food, beverages, and various household and personal products. They can often pass on higher costs to the consumer, which maintains their margins and profitability.

Loblaw Companies

First up is Loblaw Companies (TSX:L). As one of Canada’s largest grocers, Loblaw engages in the grocery, pharmacy, health and beauty, apparel, financial services, telecommunications, and general merchandise businesses through both corporate and franchise stores. What’s more incredible is that the company has been around since 1919.

Loblaw is not a fancy growth stock, but it is a very stable, mature blue-chip stock with excellent fundamentals and management. The company currently has $2.44 billion of cash on the balance sheet, a current ratio of 1.37, and operating cash flow of $4.83 billion, allowing it to weather bad economic conditions with ease.

With a very low beta of -0.02, Loblaw has very low volatility compared to the overall TSX. This makes it a great anchor for your portfolio during turbulent market conditions. With over 47.36% of the share float held by insiders, it’s a good bet that management believes the company is undervalued. The company also pays a modest dividend yield of 1.33%.

Metro

Next up is Metro (TSX:MRU). Like Loblaw, MRU also operates in Canada as a retailer, franchisor, distributor, and manufacturer of food and pharmaceutical products. The company currently operates a network of 963 supermarket and discount stores, and 649 drug stores, all under various regional brands.

MRU has weaker fundamentals compared to Loblaw but are still solid for its sector. The company currently has $198 million of cash on the balance sheet, a current ratio of 1.10, and operating cash flow of $1.53 billion, which should give it enough runway to deal with recessionary conditions and high inflation.

MRU also has a very low beta of just -0.09, making it an excellent holding to lower the volatility of your portfolio. MRU also pays a dividend of $1.1 per share for a yield of 1.58%. The current payout ratio is 21.93, which is sustainable. Although MRU doesn’t have as impressive fundamentals as Loblaw does, buying both for diversification is a good idea.

The Foolish takeaway

Investing during a recession doesn’t mean just holding on to gold, cash, and bonds (a bad idea with rising interest rates). Stocks from the consumer staples sector can add excellent value to your portfolio, even during a prolonged bear market. These companies are able to maintain their margins during hard times, thanks to the essential nature of their products and services.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

ETF stands for Exchange Traded Fund
Investing

Here’s the Average TFSA Balance at Age 54 in Canada

Here are two ways to optimize your TFSA for either growth or income via ETFs.

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

An investor uses a tablet
Tech Stocks

Canadian Tech Stocks to Buy Now for Future Gains

Not all tech stocks are created equal. In fact, these three are valuable options every investor should consider.

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

Asset Management
Stock Market

3 of the Best Canadian Stocks to Buy Right Now

Are you looking for stocks that could be a major bargain right now? These three Canadian stocks could provide some…

Read more »