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Written by Daniel Da Costa at The Motley Fool Canada
If you’re investing in the stock market, it’s important to know that inflation is typically normal. In fact, in normal economic environments, the Bank of Canada and Federal Reserve typically target a 2% annual inflation rate. So, policymakers will often worry more about inflation being too low or negative than they will be about it being too high.
However, the pandemic created the perfect storm for inflation to gain significantly. The economy was artificially shut down. So, while we needed tonnes of capital to help prop it up for the time being, there weren’t necessarily any systematic issues that needed correcting.
When the economy could open back up again, and many industries could operate at almost full potential immediately, there was always a strong possibility that we would start to see prices rise significantly.
Inflation can have a devastating impact on much of the economy. Some of the hardest hit are consumers, especially those with fixed salaries or incomes. The most recent inflation report showed prices are growing by almost 5%. That’s a massive hit to consumers’ incomes.
You continue to earn the same dollar value in the short term. However, those dollars can buy you less and less each day. This drives consumers to start changing their habits and making different decisions. As we all know, a penny saved is a penny earned. So, with inflation picking up significantly, while it could be a major headwind for some stocks, it can also be an opportunity for some companies.
Dollarama is a top retail stock to buy in a high-inflation environment
As prices rise and consumers are getting less bang for their buck, one of the ways to save money while still buying the essential staples you need is by shopping at discount retailers such as Dollarama (TSX:DOL).
Dollar stores have gained a tonne of popularity among consumers over the last few decades. They specialize in selling cheaper, more inferior essential household items and staples. These are goods that consumers need to buy. However, they are items where consumers are more price sensitive rather than caring about the quality. They need to buy these goods but also want to save as much cash as possible.
You can see the massive expansion that Dollarama experienced after the 2008 recession. In 2007, the company had just 500 stores across Canada. By 2011, it had already opened another 200 stores, taking advantage of the major shift in consumer habits. By 2015, the company had 1,000 stores across Canada, doubling its store count in just eight years.
What benefits Dollarama is that a lot of these habits can end up sticking with the consumer. Once you’re used to buying your essential goods for cheaper, a lot of consumers won’t go back even when their incomes do rise. This leads to tonnes of long-term growth potential, which we’ve seen in the past.
It isn’t just the tailwind in the industry, though. Dollarama is a top retailer and has done an incredible job merchandising and driving sales during each store visit from consumers. So, it’s a great stock to buy for the long run, but it could also see a significant boost in the short run due to this inflation.
It might not be completely smooth sailing for the high-quality growth stock going forward. Supply chain issues could certainly impact the stock.
But with the ability to pass on higher costs to consumers and inflation continuing to drive consumers to look for cheaper alternatives for their essential goods, Dollarama stock should have a tonne of potential to continue improving its sales, margins and, of course, its profitability.
Over the last 10 years, the stock has earned investors a total return of 865%, or a compounded annual growth rate of more than 25%.
So, with the stock trading at a forward price-to-earnings ratio below 25 times and in the process of buying back a tonne of shares, it’s certainly a high-quality growth stock that you can have confidence buying for the long haul.
The post This Canadian Retail Stock Could See a Significant Boost Thanks to Inflation appeared first on The Motley Fool Canada.
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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.