Colorful fresh fruit and vegetables for sale in local supermarket
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Equity markets ended the first quarter with their worst performance in more than a decade. While stocks are down across the board, some sectors are being hammered less than others.

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At the end of last week, consumer staples on the S&P/TSX Composite were down nearly 13% year to date. In contrast, the overall index was down nearly 26%, and consumer discretionary stocks were down more than 34%.

“As a general statement, consumer stocks have held up, but it is mostly driven by the performance of consumer staple stocks,” said equity analyst Chase Bethel of CIBC Asset Management in a March 23 interview.

It’s been a “tale of two subsectors,” he said, referring to consumer staples versus consumer discretionary.

Canadian consumer staples, like food and drug retailers Loblaw Companies Ltd. and Metro Inc., along with relatively defensive businesses like Jamieson Wellness Inc., a manufacturer, distributor and marketer of health products, have benefited from recent consumer spending.

This dynamic is also playing out south of the border, with retailers like Kroger, Costco and Walmart outperforming the S&P 500.

“Some third-party reports have suggested as much as a 70% increase in traffic to Costco, as consumers began pantry loading as Covid-19 anxieties rose,” Bethel said. The company’s sales increased 3% in February, attributable to increased consumer spending in the last week of the month alone.

While the amount of increased sales so far for Canadian grocers is unknown, “it would be an understatement to suggest that volume or tonnage growth will easily surpass the typical range of zero to 2%,” he said.

The hardest hit consumer discretionary stocks have been hard goods manufacturers, cyclicals, restaurants and retailers.

Bethel also said the market is penalizing highly leveraged companies or those exposed to worsening consumer credit or business-to-business counter-party credit risk.

“This appears to be the case across both staples and discretionary stocks,” he said. “In the current period, it is a benefit to have a clean balance sheet and to run a business with a short accounts receivable cycle and with limited credit risk.”

Top consumer picks

In addition to Loblaw, within Canadian consumer staples Bethel said he’s “most positively inclined” toward global dairy processor Saputo.

The Montreal-based company is led by a “proven” management team, he said, and the global supply/demand for dairy is expected to remain “fairly balanced.”

However, Saputo will be negatively affected by the decline in dining out.

“Just over a third of [Saputo’s] sales relate to food service,” Bethel said, including casual and fine dining.

Still, that third includes pizzerias. “With more consumers shopping at grocery stores and eating at home, growth at food retail could help to partially offset some of [the sales decline].”

For Loblaw, Bethel expects sales volumes to grow “strongly” in 2020.

Further, “Covid-19 tailwinds for the overall market will mean less intense competition for grocers for most of the year,” he said. “With many restaurants closed or offering only takeout or delivery options, grocers are the primary beneficiaries.”

Loblaw also owns Shoppers Drug Mart, which “should continue to see good pharmacy sales, even as front-end sales of cosmetics may be somewhat challenged in this period,” he said.

Within consumer discretionary, Bethel’s picks include Magna International, Canada Goose and Restaurant Brands International, despite current headwinds.

“While these stocks have underperformed based on their near-term prospects, we’re still positive on the long-term opportunity for each of these companies,” he said.

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