Best Canadian Stocks to Consider in an Upcoming Recession


Recent Canadian economic data had recession alarmists out in full force and for good reason.

For the fourth quarter of 2018, Canadian GDP grew a meagre 0.1%, or 0.4% annualized,  a 'barely-there' number that could well vanish in subsequent data readings and even turn negative.

Brian DePratto, senior economist at Toronto-Dominion Bank,  went so far as to say that the country was facing a perfect storm. The fourth-quarter figures bear him out - consumption spending was weak, investment in housing plumbed decade-lows and business spending declined for the second quarter on the trot. A deceleration in global growth also made matters worse. One consolation was a robust jobs market.

A study by the Canadian Imperial Bank of Commerce (CIBC) said this was Canada's second brush with near-recession conditions after 2015. But ominously, the bank warns that a third instance of a recession risk looms in 2020 when the US could witness a slowdown after exuberant growth and jobs conditions in this year. The Canadian and US economies are pretty much joined at the hip and if the US slows down, Canada could also feel the pain.

According to Deloitte, Canada's economy stalled in Q4 but did not derail. They think the Canadian economy will likely grow a tepid 1.3% this year and a marginally better 1.5% in 2020.

But when elephants fight, it is the grass that suffers. And that brings us to the recessionary implications for Canada from the US-China trade showdown.

US China trade wars: Spanner in the global works

Economic risks are now all the more serious given the unfavourable developments in the trade talks between the US and China. The US has reacted to the apparent stalemate by raising tariffs on $200B of Chinese imports, and further action is contemplated by extending their reach to all imports worth $325B from China. China has played tit-for-tat by upping tariffs on $60B of US goods with effect from June 1.

According to Brian DePratto, senior economist at TD Economics, an estimated 0.1 per cent could be shaved off from Canada's economic growth over the next year as a result of the dispute. More serious will be the damage to Canada's already weak business confidence.

The fall-out on the common Canadian, personally, may be higher prices for consumer goods, TVs and tires. Unfavourable hits to the financial markets will also affect their retirement accounts such as RRSPs.

Global Recession?

Moreover, Canada cannot also hope to escape the global slowdown that may result from Trump's confrontations with China, not to mention already simmering disputes with the EU, and Mexico. Canada itself has  an ongoing trade dispute with the US.

According to Bloomberg economist Maeva Cousin: “Higher tariffs would mean lower margins for producers and higher prices for consumers and, in turn, reduced demand. This would create widespread disruption along the supply chain.”

Morgan Stanley has warned that if the two sides do not find a solution there could be a global recession with growth below 2.5% by 2020.

Recession or Not - How to play defence

With storm clouds on the global economic horizon, and Canada already on a weak domestic growth trajectory, it may be time to take a hard look at recession-proof investing.

(Read our US-stocks focused primer on recession here)

Typical strategies for a recession include investing in companies that have a history of earnings growth and regular dividends, sectors that don't suffer from a demand hit (such as staples, healthcare, entertainment), and stocks in foreign markets. Bonds, cash and bullion are also options, but this article focuses on equities.

Canadian stocks for the bunkers

Here's a list of our stocks picks should you want to seek shelter from a recessionary storm.

1. Canada Goose Holdings Inc (TSX:GOOS) @ $65.03

Perhaps appropriately, an extreme weather clothing company is one of our picks for defensive investing.

Founded in 1957, the company makes premium outdoor apparel for men, women, youth, children, and babies. The company operates in two segments, Wholesale and Direct to Consumer. As of April 09, 2019, it operated 11 retail stores. The company also sells its products through e-commerce in 12 countries.

For the fiscal third quarter of 2019 i.e. the December 2018 quarter, the company reported EPS of $0.73, which beat estimates by $0.11, and revenue of $300.44M which beat by $28.41M.

The company does not currently pay a dividend and looks expensive at the current price of $49.20 which translates to a PE ratio of 38.13.

But what’s going for the stock is its excellent brand value which has resulted in impressive revenue growth and improvement in margin. Revenue grew 46% in 2018 compared to 2017.  Its trailing twelve-month gross profit margin is currently 45.24%.

The company's initiatives to boost wholesale distribution and its direct-to-consumer business (online or physical) are paying off in terms of revenue growth, and also likely to further enhance already fat margins.

2. TELUS Corporation (TSX:T) @ $49.35

This is a mobile play, a market which is a necessity and unlikely to suffer a severe downturn even in recessionary times.

TELUS Corporation provides a range of telecommunications products and services in Canada.  Operating through Wireless and Wireline segments, the company’s products and services comprise wireless and wireline voice and data services; data services, including Internet protocol; television services; hosting, managed information technology, and cloud-based services; healthcare solutions; customer care and business services; and home and business security solutions. It has 13.4 million subscriber connections.

Telus has a market cap of $22B and a PE ratio of 13.68.

For the latest quarter the company reported EPS of $0.56 which was in line with expectations and revenue of $2.6B which missed by a negligible $11.41M.

At the current price its dividend is yielding 4.42%. The company has grown its dividend every year for the past three years.

Operationally, the company said on its earnings call that it grew its  combined wireless mobile phones and connected devices, Internet, and TV customer additions by 50% over the previous year. EBITDA grew by a robust 8.4%.

Last month, Telus acquired important 600 megahertz spectrum licenses covering British Columbia, Alberta, Eastern Ontario, and Southern and Eastern Quebec, and this will enhance its network footprint and subscriber base.

The stock has the potential for substantial appreciation if it is able to take out a long-term resistance zone clustered in the $38-$39 zone.

3. Franco-Nevada Corp (TSX:FNV) @ $102.22

Precious metals mining and trading companies offer defence from a recession as the underlying asset, such as gold, is viewed as a safe-haven asset.

Franco-Nevada Corporation operates as a gold-focused royalty and stream company in the United States, Canada, Latin America, Australia, and Africa. It also holds interests in silver and platinum group metals; and oil, gas, and natural gas liquids.

Franco-Nevada does not mine any gold, instead it takes a share of the gold output from miners it finances. This off-take is generally at low prices.

At current prices the stock yields a dividend of 1.32%.

The company's assets are well-diversified and it is not economically dependent on any single asset. It earns its royalties and streams on properties mined by some of the most reputable mining companies in the world.

4. Fortis Inc. (TSX:FTS) @ $50.13

Utilities are a defensive investment in recessionary conditions because they are safe, stable and offer a steady cash stream via dividends.

Founded in 1885, Fortis is an electric and gas utility company in Canada, the United States, and the Caribbean. It operates solar, gas-fired and hydro-electric  power generating facilities and is also a natural gas distributor. It is also an owner of transmission and distribution systems, natural gas pipelines and natural gas storage facilities.

The company pays a steady dividend yielding 3.6% and is ranked as a Dividend Aristocrat.

For the quarter ended March 2019 Fortis reported EPS of $0.55 which was in line with estimates while revenue of $1.81B beat estimates by $46.29M, and was up 6.05% year on year. It currently trades at a PE Ratio of 14.71.

The company said in its earnings call that it plans to invest $3.7B in 2019 and about $17B over the next five years. The company also is confident that it will grow its dividend at an annual growth rate of 6% through 2023.

5. Algonquin Power & Utilities Corp. (TSX:AQN) @ $15.70

Another utility, Algonquin Power & Utilities Corp. owns and operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in Canada and the United States. It generates and sells electrical energy through a portfolio of non-regulated renewable and clean energy power generation facilities. The company also owns and operates hydroelectric, wind, solar, and thermal facilities with a combined gross generating capacity of approximately 1.5 gigawatt; a portfolio of regulated electric, natural gas, water distribution, and wastewater collection utility systems.

For the latest quarter ended March 2019, Algonquin reported EPS of $0.19 which missed estimates by $0.03. Revenues of $477.20M missed by $48.19 and were down 3.56% year-on-year.

The current dividend yield is 4.37% and the company has grown its dividend for the last seven years.

The company trades at a market cap of $5.75B and a PE ratio of 27.12.

The company foresees steady, consistent growth in the future.

6. Brookfield Renewable Partners L.P. (TSX: BEP.UN) @ $43.06

Brookfield is a utility focused on renewable power generation. The company generates electricity through hydro, wind, solar, co-generation, and biomass sources and owns a portfolio of renewable power generating facilities primarily in North America, Colombia, Brazil, Europe, India, and China.

Its portfolio consists of approximately 17,400 megawatts of installed capacity and $47B of power assets.

It is one of the largest public pure-play renewable businesses gradually.

The current dividend yield on the stock is a generous 6.44%, and the company has been growing its dividend since the last nine years.

For the March 2019 quarter it reported an EPS of $0.14 which surpassed estimates by $0.02. Revenue came in at $825M and beat forecasts by $22.12M.

The company has a solid balance sheet with a concentration of prized hydro-power assets. The company boasts of available liquidity of $2.3B and a comfortable debt maturity profile.

In its earnings call BEP said: "We believe the business is well-positioned to deliver strong results during all points of the economic cycle... Should the markets weaken, we believe our strong balance sheet, our liquidity, our robust asset sales program and access to capital will reduce the need to issue equity to fund growth. Accordingly, we believe we are one of the few companies in this sector with the strategy and the financial flexibility to benefit during periods of both market strength and weakness."

7. Alimentation Couche-Tard (TSX:ATD.B) @ $84.31

Apart from the fact that retail stores, and more particularly convenience stores, are a natural shield against recession, the most compelling reason to buy Alimentation Couche-Tard is the technical strength on its chart, setting it apart from rivals such as Dollarama and Canadian Tire.

Based on revenues, ATD is the largest Canadian company. It has 16,072 stores strewn across North America, Europe, under the CAPL network and including the Circle K branded sites. That's a huge jump considering it started operations in 1980-1990, with most of the store additions coming through canny acquisitions at lower transaction multiples.

It has grown its EBITDA, currently $3.6B, at a 5-year CAGR of 5.1%. Merchandise and Service Sales have grown at a CAGR of 11% during 2013-2018. During the same period, road transport fuel quantity has grown at 16% CAG.

Interesting fact: 83% of in-store merchandise that convenience stores sell is consumed within one hour of purchase, and 65% is immediately consumed. This is inbuilt-defence against on-line.

The company had a bumper third quarter 2019, even though both EPS and revenue missed expectations.

Though its dividend yield is a lowly 0.51%, ATD is a consistent dividend payer.

The stock trades at a market cap of $35.38B and a PE ratio of 18.27.

Considering the growth trajectory and management execution, this is not expensive.

8. Rogers Communications Inc (TSX: RCI-B) @ $68.75

Another pick from the telecom pack, Rogers Communications Inc. operates as a communications and media company in Canada.  Both telecommunications and entertainment are relatively recession-proof sectors.

Rogers operates through three segments: Wireless, Cable, and Media. The Wireless segment provides its services to approximately 10.8 million subscribers. The Cable segment covers approximately 4.4 million homes. The Media segment owns the Toronto Blue Jays league baseball team and the Rogers Centre event venue; and offers television and radio broadcasting, multi-platform shopping experience, digital media, and publishing services.

The stock pays a forward dividend yield of 2.97% and trades at a PE (ttm) of 17.48.

The company has refocused its operations in recent years to improve service, reduce debt, and provide valuable products and services to customers. These efforts have proved successful, as evident from the share price - which entered an uptrend in the latter half of 2015.

After touching an all-time high of $73.56, the stock has corrected somewhat.

Harvi Sadhra