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Warren Buffett said investors should buy the stocks of big companies and hold them forever. At Motley Fool, we take Buffett’s advice to heart and believe in the power of a long-term perspective in investing.
While everyone likes to find a good stock that’s undervalued, sometimes it’s better to buy the stock of a great company at a fair price, as opposed to a stock of a mediocre company at a fair price. Stocks of companies with excellent sustainable performance are ideal stocks to buy and hold.
For this reason, new Canadian investors should focus on stocks of blue chip companies with excellent fundamentals, understandable business models, essential products and services, wide economic moat, strong financial ratios and good management.
As one of Canada’s largest grocers, Loblaw (TSX:L) is a great pick for consumer staples stocks. Companies like Loblaw produce or sell staple foods that people need to buy out of necessity regardless of economic conditions, such as food, beverages, and various household and personal products.
The company has been in existence since 1919 and currently operates in grocery, pharmaceutical, health and beauty, apparel, financial services, telecommunications and general merchandise through corporate and franchise stores.
As a defensive stock pick, Loblaw has excellent characteristics, such as a very low beta of -0.02. This makes it significantly less volatile than the market. The company is poised to weather the crisis well, with $2.44 billion in cash on the balance sheet, a current ratio of 1.37 and operating cash flow of $4.83 billion.
Loblaw is a solid enough company that I don’t bother trying to get a good entry price. However, new investors should still be aware of some basic valuation metrics, so they can understand how companies are valued and what influences their current stock price.
Currently, Loblaw is trading at $111.76, which is near the 52-week high of $119.58. In the current fiscal quarter, Loblaw’s 52-week low is $69.99. This is useful, as it allows investors to get an idea of the recent trading range and potential dips/highs.
Loblaw currently has a market capitalization of $37 billion and approximately 333 million shares outstanding. This gives it an enterprise value of $51 billion with an enterprise value to EBITDA ratio of 8.61, which is similar to its peers in the consumer staples sector.
Over the past 12 months, Loblaw’s price-to-earnings ratio was 19.10, with a price-to-free cash flow ratio of 7.91, a price-to-book ratio of 3.20, a price-to-sales ratio of of 0.71 and book value per share of approximately $32.95. By these metrics, Loblaw appears fairly valued relative to its industry peers.
Loblaw has a Graham’s number of $57.01 for the past 12 months – a measure of a stock’s upper bound intrinsic value based on its earnings per share and book value per share. Generally, if the stock price is below the Graham’s number, it is considered undervalued and worth investing in. In this case, Loblaw’s current stock price is not undervalued.
Is it a purchase?
Although its current stock price is fairly valued, long-term investors should consider establishing a position if they have the capital. Over the next 10 to 20 years, your price of entry won’t matter as much if Loblaw continues its strong track record of growth and profitability.
Consistently buying Loblaw stock, especially if the market is correcting, can be a great way to secure a low-cost base. As a consumer staple, Loblaw could be an excellent defensive pick for a portfolio in a recession.