In this series, we reviewed all of the TSX and TSX Venture’s stock and came up with what we think the best candidates are. Here are the Best Consumer Sector Stocks In Canada, as well as the methodology that got us there.
(Updated Jan 31, 2023) A consumer sector stock is a company that produces or sells products and services for consumers, such as Automobiles, Clothing & Recreation, as well as Food and beverage, Healthcare or Household products. Consumer cyclical stocks (the first group) are those that are more sensitive to changes in the economy, while consumer defensive stocks (the latter) tend to be less affected by economic fluctuations.
What is good about investing in consumer stocks is that, as an investor, you have access to a wide variety of companies and products. There is also a strong potential for growth as the economy expands and many of these companies give dividend income.
The bigger risks are that companies may be impacted by changes in consumer spending and that competition from other companies can be intense. Consumer tastes can change quickly, impacting companies’ sales. There is also the potential for economic downturns, which can adversely impact the consumer sector. If companies are leveraged, meaning they have a lot of debt and may not be able to withstand tough economic times, it can compound the effect of an economic downturn.
Methodology For Ranking The Top Consumer Stocks In Canada
To come up with the list, we’ve started with all consumer stocks on the TSX and on the TSX Venture. We’ve then made sure that the company has a Return on Equity higher than 12%, which for a consumer stock makes sense. You would expect shareholders equity to at least grow at that pace for these companies to be worth investing in. We’ve also made sure that the companies on the list had consistent long term revenues and positive earnings.
This criteria is so difficult to meet given that most of these candidates went through the pandemic with negative earnings or a decrease in revenue, that only two companies made the cut. One of them seems interesting enough to research.
We’ve then sorted the top Canadian consumer sector companies by free cash-flow yield – the best metric to differentiate a good from a bad investment, all else being equal – from the highest to the lowest:
- RET, with an ideal PE ratio of 6, 22% free cash-flow yield but no dividend, Reitmans Limited returned the highest result. It stock price has increased by 71% since we included it in that list but it still hold the first position for the best consumer stocks in Canada;
- ZZZ, with a much higher PE ratio of 10, an excellent 17% free cash-flow yield and a decent 3.3% dividend yield, Sleep Country Canada Holdings Inc is also a very interesting name on that list;
- TOY, with a PE ratio of 9, an excellent 14% free cash-flow yield and a small 0.7% dividend yield, Spin Master Corp. takes the bronze for the Best Consumer Stocks In Canada.
Free cash-flow yield goes down a lot from that point on, for all of the TSX. Our long-term darling MTY Food Group would hold one of the best consumer stocks in Canada positions at the moment with 11% FCF yield, even after increasing 20% in the last month, but it doesn’t exactly make the cut here.
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