Two Top Canadian Stocks to Buy Today On Supply Chain Fears

ByDan Kent Published On:

There are a multitude of issues right now when it comes to supply chains and the pandemic. As such, many Canadian stocks are reducing guidance simply due to uncertainty.

When guidance gets reduced, it often has a negative impact on share prices. However, for longer term investors who can see past the economic hardships over the next year or two, it has presented some bargains that could potentially pay off for patient investors.

In this article I’m going to look at two stocks that have been impacted by supply chain worries and are trading at discounts to their historical averages.

  • Dollarama (TSX:DOL)
  • Martinrea International (TSX:MRE)

Dollarama (TSX:DOL)

TSE:DOL Performance

A company that was once growing at a rapid pace, Dollarama (TSE:DOL) has undergone a significant slowdown in top and bottom line growth over the last few years. However, that doesn’t necessarily mean this is a poor company. In fact, Dollarama is a solid consumer defensive stock for Canadians, arguably one of the top Canadian retail stocks to buy.

The company produces low cost products, popular among discount shoppers, and in the event of an economic downturn practically everyone. The company has a significant competitive advantage, having more stores than its 4 largest competitors combined. In fact, Dollarama is nearly 6 times larger than its closest competitor Dollar Tree.

Why is Dollarama (TSX:DOL) going through a multi-month downtrend?

The company is still hesitant to declare any sort of guidance heading into next year, and has tempered expectations due to supply chain issues and the impact of the global pandemic.

As such, the company has been having somewhat of a rocky recovery, with significant peaks and troughs. Based on its September 2021 earnings, Dollarama is currently in one of those troughs, and investors with a long term attitude could potentially find value here.

From a valuation standpoint, Dollarama is trading at 21 times forward earnings and 3.5 times forward sales. It’s important to understand that although this company has slowed in growth, it hasn’t completely evaporated. In fact, the company still managed to post both top and bottom line growth in 2020 despite being significantly impacted by the pandemic.

Dollarama (TSX:DOL) still a contender

Moving forward, analysts still expect high single digit growth in terms of revenue and double digit growth in terms of earnings for Dollarama over the next few years. 21 times earnings for a company with this level of growth, market share, and defensive nature is certainly a reasonable enough valuation that Canadians should be giving Dollarama a look today.

Martinrea International (TSX:MRE)

TSE:MRE Performance

Similar to Magna International, Martinrea International (TSE:MRE) is a producer of steel and aluminum parts, primarily used for the automotive sector. Make no mistake though, Magna is much bigger, as Martinrea currently has a market cap of just over $900M.

The company manufactures things like engine blocks, suspensions, chassis, and fluid management systems. The primary market for its products are right here in North America.

Analysts tune down price targets on Martinrea (TSX:MRE)

Supply chain worries and overall inflation have been somewhat of a double whammy for auto parts producers. Chip shortages are causing guidance to be reduced, rising commodity prices are shrinking margins and overall analysts have been tuning down price targets on Martinrea.

However, considering most targets on the street are in the $17-18 range, Martinrea is still trading at a significant discount to analysts 1 year estimates, and there is no doubt the company is cheap right now.

Trading at only 5.2 times forward earnings and 0.22 times forward sales, Martinrea has simply never been this cheap except for a short duration during 2018. The company’s PEG ratio of 0.90 suggests that the market isn’t factoring in the company’s potential growth moving forward, likely out of fear of further supply issues.

Lofty expectations for Martinrea (TSX:MRE)

If we look to forward estimates, there are some lofty expectations for Martinrea. Although I’d place a high degree of speculation on these estimates simply due to the fact there is too much uncertainty in the industry moving forward, the fact the company is expected to post double digit growth in terms of revenue and 50%+ annual growth in terms of earnings over the next few years makes this stock seem cheap.

Historically Martinrea has been a company that has struggled with consistency, and it’s unlikely I’d be looking to invest in this one for the long term. However, there is no doubt it presents somewhat of a short term opportunity due to overall fears in the market. I’d consider this a higher risk play that pays out a moderate dividend while you wait.