Analysts follow as many as 20 stocks, most of which are rated “buys.” Of those buys, an analyst has one or two special favorites seen as most suitable for new buying. This column is devoted to those one or two favorite “best buys.”
Ranking high on the list of these top Canadian stocks is Loblaw Cos. Ltd. (L-TSX, $46.43), the Brampton, Ont.-based retail grocery giant. Just ask Michael Bowman.
Mr. Bowman is executive vice president and portfolio manager of Wickham Investment Counsel in Hamilton, Ont.
And he’ll tell you that in President’s Choice and no name, Loblaw boasts two of the most popular brands in Canada.
He’ll also tell you that as Canada’s biggest retail grocery chain, Loblaw obviously benefits from the advantages that come with being the biggest kid on the block.
Loyalty program helps boost sales
But size and brand appeal aren’t the only reasons Mr. Bowman likes the Canadian stock giant, Loblaw. He also likes the way it’s used its loyalty program to pull in additional sales.
That program, PC Plus, offers members discounts on selected items. But by enticing shoppers to come in and buy such merchandise, the program also exposes them to non-discounted items.
And with 5.2 million PC Plus members, there’s a good chance at least a few will buy regularly-priced merchandise.
Then, there’s Loblaw’s recent purchase of Shoppers Drug Mart, one of Canada’s biggest pharmaceutical chains.
Not only is the acquisition expected to give Loblaw many opportunities for cross selling, it’s also seen as saving the grocery chain $300 million over the next three years.
Another Loblaw plus? Its relative cheapness. With a low ratio of price to EBITDA (earnings before interest, taxes, depreciation and amortization), the company is now a bargain, says Mr. Bowman.
For Mr. Bowman, Loblaw is a best Canadian stock buy — one with a 12-month price target of $54 a share, as well as expected EPS for 2014 in the double digits.
In addition to President’s Choice and no name, Loblaw’s brands include Joe Fresh, Blue Menu and Organic.
For the first quarter of 2014, Loblaw’s net income fell to $103 million, or $0.37 a share, from $171 million, or $0.61 a share, for the similar period in 2013.
Revenue inches up
Revenue, however, was slightly higher, rising $100 million, or 1.4 per cent, to $7.3 billion, while operating income tumbled $56 million, or 18.1 per cent, to $253 million.
Mr. Bowman may like a consumer staples play like Loblaw where you can buy different brands of vegetable oil. But he also has a soft spot for an energy outfit like Whitecap Resources Inc. (WCP-TSX, $14.80) which sells oil that’s pumped from the ground.
For one thing, Whitecap pays a dividend. And although every investor, says Mr. Bowman, should have oil in his portfolio, it makes little sense to buy an oil company that pays no dividend.
Moreover, because Whitecap boasts one of the lowest payout ratios in its peer group, it’s not only able to sustain its dividend, but likely raise it as well.
Another plus? The quality of its holdings. Not only do the assets Whitecap recently bought from Imperial Oil Ltd. (IMO-TSX, $54.13) boast a high cash flow, they also have a low decline rate, thereby lengthening their lifespan.
Indeed, the purchase fortifies Whitecap’s business model of sustainable production and dividend growth, says Mr. Bowman, who also lauds the company’s exploration ability.
And Whitecap is a skilled explorer, having notched a 100 per cent success rate with the 77 wells it has so far drilled this year.
For Mr. Bowman, Whitecap Resources is also a best Canadian stock buy — one with a 12-month price target of $18, as well as 2014 and ’15 cash flow per share estimates of $2.09 and $2.49, respectively.
Whitecap is also a good dividend story, having recently raised its annual payout 10 per cent to $0.75 a share, for a five per cent yield.
Based in Calgary, Whitecap boasts operations in northeast British Columbia, west central Saskatchewan and west central Alberta. It’s also active in Alberta’s Deep Basin, as well as in the Peace River Arch in the province’s northwest corner.
For the three months ended March 31, Whitecap’s net income fell to $4.5 million, or $0.02 a share, from $5.6 million, or $0.04 a share, for the similar period in 2013. Revenue, however, was higher, rising 55.2 per cent to $105.7 million, while expenses climbed $38.9 million, or 64.7 per cent, to $99 million.
[Rob Belanger, a research analyst at Wickham Investment Counsel, contributed to this report]
Investor’s Digest of Canada, MPL Communications Inc.
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