Some investors overlook large-cap stocks because they get the idea that due to their large size (and can be seen everywhere), the businesses are mature and going to grow slowly, leading to low returns for investors. The buy-low, sell-high strategy can work well for large-cap stocks because they can also experience ups and downs.
Buying shares of solid businesses when their stock prices are down could potentially drive substantial returns over the subsequent three to five years from valuation expansion under favourable conditions.
RBC stock
For example, Royal Bank of Canada (TSX:RY) is a leading bank in Canada with over 1,100 branches in the country. There’s probably one location near you. Among the Big Six Canadian bank stocks, Royal Bank of Canada has the largest market cap of about $168 billion.
RBC stock bounced north of 11% from its recent bottom of $108 per share. However, it’s still down about 9% over the last 12 months, underperforming the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy.
RY and XIU 1-year stock price change data by YCharts
The stock price is down primarily due to a higher provision for credit losses (PCL) in a higher interest rate environment. For instance, in the last reported quarter, RBC increased its PCL by 81% year over year to $616 million, which weighed on earnings. However, the fiscal year to date (YTD) PCL as a percentage of impaired loans was still very low at 0.20%. So, the business fundamentals remain strong.
At $120.49 per share, RBC stock trades at about 10.7 times adjusted earnings. This is a decent price-to-earnings ratio for the bank that was able to deliver solid adjusted earnings-per-share (EPS) growth of about 8.5% per year over the past 10 years.
In fact, this multiple represents a discount of about 11% from its long-term normal valuation. I’ll have you know that even during the pandemic-hit year of 2020, the bank still delivered a respectable return on equity (ROE) of north of 14%. Its fiscal YTD adjusted ROE is solid at 15.7%.
At the recent quotation, the Canadian bank stock also provides a safe dividend yield of approximately 4.5%. All told, RBC stock is a good long-term investment for conservative investors right now.
Canadian Tire stock
Over 100 years old, Canadian Tire (TSX:CTC.A) is an iconic retailer in Canada. However, because it sells a good portion of consumer discretionary goods, the business is expected to be hit hard in today’s higher interest rate environment. Its earnings are expected to drop by about a third this year.
Given that its performance is dependent on consumer demand, the stock is set up for greater volatility through the economic cycle. Here’s a recent example. Between July and October, the stock dropped as much as about 25% from peak to trough. However, it appears it was too cheap to ignore as the Canadian retail stock bounced more than 9% from the bottom of about $135.
Other than Canadian Tire, its other brands include SportChek, Mark’s, and Party City, which target different niche markets. Earlier this month, the company reported a decline of 1.6% in comparable sales as consumer spending continued to soften, particularly at SportChek which witnessed comparable sales falling 7.4%. Ultimately, it reported YTD normalized diluted EPS of $7.00, down 26%. Canadian Tire’s launch of a new online gift registry could be a near-term positive to help drive sales for the upcoming Christmas.
The dividend stock does pay a growing dividend that appears to be safe with a yield of 4.7% at the recent quotation of $147.82 per share. The Canadian Dividend Aristocrat’s trailing 12-month payout ratio is 63%. Despite experiencing a challenging operating environment, this month it made a token dividend increase of 1.4%. In summary, the stock could deliver double-digit returns per year over the next three to five years, assuming consumer demand strengthens within the period.
