Don't Miss AI's Third Wave
The Bank of Canada (BoC) surprised many Canadians this week when it announced yet another rate hike of 25 basis points (bps). Indeed, the tightening continues, as Canada’s central bank looks to finish its job of pushing inflation lower. Undoubtedly, higher rates present a huge challenge to many indebted Canadians. That said, I think you have to respect the Bank of Canada’s latest decision. It’s taking inflation seriously. Though inflation has come down since its peak, there’s a chance that it could be “stickier” than expected. Elevated levels of inflation have already stuck around for way too long.
Where the Bank of Canada goes from here is anyone’s guess. Regardless, investors shouldn’t be so shocked if another few 25-bps rate hikes are in the cards from here. Inflation is a hard beast to slay. Though central banks get no joy from inducing pain from rate hikes, I continue to view high interest rates as less horrific than inflation above the 2% mark.
Rates could pause and turn at any time. But investors shouldn’t position their portfolios in a way that depends on easy monetary policy. Intriguingly, tech stocks have been in rally mode, even with rates as high as they are. I view the recovery as mostly driven by AI hype and relief after last year’s tumble. If rates inch higher, I’m not so sure the tech stocks that have performed best on a year-to-date basis are the best of bets at this moment in time.
Instead, I like “boring” companies that can persevere through a higher-rate, recessionary environment.
Dollarama: Giving Canadians bang for their buck
Canadian dollar store chain Dollarama (TSX:DOL) stands out as a great pick to buy as rates (and inflation) stay elevated over the next 12-18 months.
The combo of high rates, lingering inflation, and rate-induced growth pressures may be a one-two punch to the gut of other companies. But not for Dollarama. The company has done well by providing Canadians with price certainty and competitive deals on a wide range of goods. Now, inflation and rates have certainly not been ideal for the company. However, the company has been able to fare better in the environment than your average S&P 500 or TSX stock.
As rates, inflation, and recession work their course, I think more Canadians could continue flocking into Dollarama. Canadians need price relief now more than ever. As pressures mount on the economic side, I’d argue that the company’s strong first quarter (23.6% rise in profits) may just be the start.
Until inflation gives central banks some space to cut rates, I think Dollarama’s growth will stay elevated. As the company continues with its expansion (2,000 new stores to open by 2031), Dollarama may be the defensive growth stock to hang onto, even at a premium price of admission.
Bottom line
The stock trades at around 28.5 times trailing price to earnings. It’s priced with the expectation of reliable growth through tough times. As Canada falls into a recession, I think the multiple could go even higher. Not many companies can thrive in such a challenging macro environment. In that regard, Dollarama is one of the defensive growth kings of the TSX Index.
