Dividend Earner recently did a blog post about Loblaws because of the low yield I normally pay much mind to it but having looked at Intact Financial (IFC) and similar stocks I realized that in what they lack in yield they make up for in capital gains. Intact (IFC) is up nearly 100% since 2010. Now Dividend Earner did a great job of the Loblaws stock metrics so I won’t repeat it here instead I’ll pull up a fast chart to see what it looks like. Now when buying a stock for capital appreciation it helps to keep in mind Benjamin Graham’s famous quote. "In the short term the stock market is a voting machine, long term it’s a weighing machine" . Basically earnings support the price. If The earnings aren’t there neither will the price. Pulling up Fast Graphs we can see that Loblaws is showing some strong earnings growth.
Add in the stock price (black line) and you can see a clear coloration between earnings and the price.
To Buy or not to Buy
Two issues show up. One specific to fastgraphs the other regarding long term earnings. On fastgraphs if you change the timeline the PE ratio (blue box right) changes and since this is the basis for making a decision it matters.
Second point is concern about growing earnings consistently. Manulife ran into problems around 2006 and the stock still haven’t recovered (down some 80%).
Understand when buying a stock what you are actually buying is a company’s earnings growth. Too high of a valuation will cause you to earn less than the company's growth warrants, and a low valuation will cause you to earn more than the company's growth warrants. Valuation matters and few give it much thought. See the photo below.
Stocks like this can add substantially to your bottom line so at the moment if feels overvalued so I'll keep an eye on it but probably won't take a position at the moment.