Why Dollarama Is the Company to Watch in the Canadian Inflation Fight

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Written by Chris MacDonald at The Motley Fool Canada

The Canadian stock market is largely dominated by finance, material, and energy stocks. Hence, if you are looking to add some diversification to your portfolio, investing in retail stocks in these sectors is a good choice.

By investing in retail stocks, you can add much-needed diversification to your portfolio as well as get a hedge against inflation. Stocks such as Dollarama (TSX:DOL) and Alimentation Couche-Tard (TSX:ATD) are great examples in this regard.

In today’s article, let’s focus on one retail stock (Dollarama) and see if it is worth investing in October 2023.

A retail growth stock with defensive attributes

Dollarama has become a popular choice among investors due to its excellent defensive qualities. In this scenario, with the looming recession and rising interest rates, any inclination towards defensive growth stocks will surely bring such investors to Dollarama.

The retail chain stock has recently made headlines with its second-quarter (Q2) financial report, exceeding analysts’ estimates. The companies saw impressive revenue growth of 19.6%, along with earnings per share growth of 30.3% on a year-over-year basis. Dollarama also has an impressive market cap of $26.7 billion at the time of writing.

The company has generously raised its dividend by 28%, and the investors are happy with a dividend payment of $0.078 for each share. That said, I expect more dividend growth on the horizon, as the company continues to grow its revenue and earnings over time.

Analysts expect that the stock will reach $100 per share by the end of this year, given the stock’s current consensus price target of $101.46 per share. With a price-to-earnings ratio of 27.2 times, DOL stock isn’t cheap, but it’s not overly expensive either. Thus, I think as long as the company continues to perform, reaching the $100 per share target seems plausible.

Bottom line 

Dollarama currently trades just a hair shy of the $100 benchmark, and I wouldn’t be surprised to see the stock breach this level before the end of the year. Of course, plenty will need to go right for this to happen. However, I think Dollarama’s status as a relatively defensive safe haven in times of uncertainty could drive capital toward this name.

The company’s fundamentals remain strong, and any sort of boost in earnings or revenue growth in Dollarama’s upcoming earnings release could also be the catalyst that pushes this stock over this key psychological threshold. We’ll have to see how this stock performs from here. But if I had to bet on a balance of probabilities, I’d say Dollarama’s future price action is likely tilted to the upside from here.

The post Why Dollarama Is the Company to Watch in the Canadian Inflation Fight appeared first on The Motley Fool Canada.

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Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alimentation Couche-Tard. The Motley Fool has a disclosure policy.