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2 Retail Stocks That Could Enjoy an Upside Correction

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Image source: Getty Images.

Written by Joey Frenette at The Motley Fool Canada

Whenever we have a stock that falls too hard, too fast, an upside correction — the opposite of a correction, which entails a sudden 10% fall in stock prices — may be in order. Indeed, stocks have been quite volatile, and they could remain this way going into 2024.

Volatility isn’t necessarily a bad thing, though. The wild ride may make investors a bit uneasy from time to time. But, at the end of the day, it’s wild swings that tend to allow contrarian value investors more opportunity to spot discrepancies between a stock’s price and its intrinsic value.

Further, many of us forget that volatility works both ways. Stocks can stumble sharply, but they can also surge without a moment’s notice! Take the November 2023 stock rally as an example of volatility that nobody on Bay Street will complain about!

The retail scene has been a choppy ride amid shifts in consumer-spending patterns. In the face of uncertainty, many consumers may be more conservative with how they spend their money, opting to prioritize necessities and high-value items on one’s personal budget.

When times are good, discretionary goods and big-ticket durables may be more in demand. However, when you’ve got folks worried about a potential fall into a recession, you should expect the discretionary retailers to sink while defensive retailers (think grocers and discount retailers) get a nice jolt.

In this piece, we’ll look into two robust retailers, Walmart (NYSE:WMT) and Canadian Tire (TSX:CTC.A).

Walmart

Walmart is an American big-box retailer that’s done quite well amid the past few years of high inflation. The company, known to offer great deals for customers, also has a grocery business that can help keep it on stable legs through challenging economic times. Though groceries can help retailers like Walmart navigate tougher environments, the margins tend to be thinner.

More recently, the stock slipped following an unimpressive quarterly earnings report. Indeed, margins may have faced a bit of pressure. And as the health of the consumer improves, it doesn’t seem like Walmart has as much to gain.

A lot of positivity was baked in prior to the quarterly flop. In any case, the stock remains fair-valued now at around 26.4 times trailing price-to-earnings (P/E). If you’re looking for an all-weather type of investment, the stock (and the 1.45% yield) may be worth picking up.

Canadian Tire

Canadian Tire is a more discretionary retailer to play the domestic economy. The stock is cheaper and has more to gain if good times are coming back for the consumer in 2024 or 2025. The stock trades at a dirt-cheap 14.3 times trailing price-to-earnings, which I don’t think makes a lot of sense given the company’s relentless investment in e-commerce and loyalty over the years. Partnerships to bring U.S. brands to Canada are also a major plus for the iconic retailer.

Like many other physical retailers, Canadian Tire could leverage its tech-savvy to jolt sales over the long run. As the company trims costs and goes into savings and efficiency mode, the firm may be setting itself up for a nice quarter at some point down the road.

Certainly, a stronger economic landscape for the new year would help. Regardless, there’s not much expectation priced in. And whenever you have low expectations, you may very well be able to get a positive surprise.

The post 2 Retail Stocks That Could Enjoy an Upside Correction appeared first on The Motley Fool Canada.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Walmart. The Motley Fool has a disclosure policy.

2023