As a dividend investor, I rarely dabble in growth stocks. I’d rather have a juicy yield than a juicy – and potentially dangerous – price-to-earnings multiple any day.
But I would be lying if I said I didn’t occasionally suffer from a case of growth-stock envy. Growth, after all, is where a lot of the action has been.
Well, until recently.
Growth stocks are a double-edged sword. When investors love them, the gains can be spectacular. But when the momentum crowd moves on – usually because investors fear a company’s rapid growth phase is over – the damage can be swift and severe. That’s because the high P/Es of growth stocks build in big expectations and leave little room for error.
Which brings us to today’s topic: Have you checked out the price charts lately for Dollarama Inc. (DOL), BRP Inc. (DOO) and Premium Brands Holdings Inc. (PBH)? Anyone who owned these high-octane stocks over the past several years made out exceptionally well, but recently all three have done a face-plant. Dollarama is down about 37 per cent from its 52-week high, BRP is off 30 per cent and Premium Brands is down 27 per cent.
But here’s the silver lining.
As their prices have come down, so have their lofty P/E multiples. Their dividend yields, meanwhile, have gone up (although two of three still yield less than 1 per cent, which isn’t going to get most dividend investors out of bed). Now that the froth has come off these stocks, let’s look at why each of them tumbled and consider whether now is a good time for investors to step in. (Disclosure: I have no position in any of the stocks mentioned.)
BRP Inc. (DOO)
Price: $51.61
Yield: 0.69 per cent
Like a thrill seeker behind the wheel of one one of its popular ATVs, BRP’s stock until recently had the throttle wide open. From early 2016 until mid-2018, the shares more than tripled. Then came a gnarly wipeout: In September, less than two weeks after the company posted blockbuster quarterly results, BRP skidded on news that major shareholders Bain Capital and the Beaudier Group planned to sell 8.7 million shares at a price well below the market. Yet, the share issue had no impact on BRP’s business, which is still firing on all cylinders. “We look at this decline opportunistically,” RBC Dominion Securities analyst Steve Arthur said in a note. Citing a new Nasdaq listing, a strong lineup of new products and the resolution of trade uncertainty, he upgraded BRP’s shares to “outperform” from “market perform.” BRP’s valuation has also gotten more attractive. When Mr. Arthur published his Oct. 9 note, BRP was trading at a price-to-earnings multiple of 16 based on projected fiscal 2020 estimates. With the stock continuing to weaken, the P/E has since fallen to about 14.6, which could prove to be a good entry point if BRP’s double-digit earnings growth continues.
Dollarama Inc. (DOL)
Price: $37.11
Yield: 0.32 per cent
Dollarama’s shares sank 17 per cent on Sept. 13 – their worst one-day rout – after the retailer reported quarterly same-store sales growth of 2.6 per cent that was half of what analysts had expected. The stock has since lost even more ground. The company attributed the weak results to a tough comparison with a year earlier and a decision to limit price increases, but some investors evidently believe Dollarama’s growth has finally hit the wall: At least five analysts have cut their buy ratings on the shares, and recently U.S. short seller Spruce Point Capital Management issued a report that called the retailer’s margins “unsustainable” and its store expansion plans “unrealistic.” Not everyone is throwing in the towel, however: Neil Linsdell of Industrial Alliance Securities called the share price drop an “overreaction” and said customer acceptance of $3.50 and $4 items gives management the ability to increase prices and achieve longer-term same-store sales growth of 4 per cent to 5 per cent. Dollarama’s shares now trade at a P/E of about 21.8 based on estimated earnings for the fiscal year that ends in January, down from a P/E of more than 30 at the start of the year. That’s still not exactly a cheap valuation, however, and investors who jump on board now are essentially gambling that Dollarama can get its same-store sales growth back toward the mid- to high-single-digit levels of the past. This holiday season could be telling for the retailer in that regard.
Premium Brands Holdings Corp. (PBH)
Price: $89.58
Yield: 2.1 per cent
Thanks to its voracious appetite for acquisitions, food manufacturer and distributor Premium Brands saw its stock price roughly triple from the start of 2016 through mid-2018. But in recent months it’s come down with a case of indigestion, hurt by profit-taking and concerns about cost inflation, a potential slowdown at Starbucks (for which Premium Brands makes breakfast sandwiches) and competition from Amazon.com. But analyst David Newman of Desjardins Securities said these and other concerns are “unwarranted” and expects that Premium Brands will post gains of 50 per cent or more in revenue, adjusted earnings per share and adjusted cash flow per share when it announces third-quarter results on Nov. 13. Further, he noted that the share price is well below its levels of last spring before the company announced a flurry of meat and seafood acquisitions that added more than $500-million in revenue and $50-million in earnings before interest, taxes, depreciation and amortization, “which reinforces our view that the recent weakness is mostly unwarranted." Another thing to keep in mind: Premium Brands has raised its dividend in each of the past four years, at a compound annual rate of 11 per cent.
John Heinzl