In inflationary times, investors often seek safety in consumer defensive stocks with pricing power. One such stock is the Canadian grocery heavyweight Loblaw Companies (TSE: L) (LBLCF). As input costs rise for Loblaw, it can pass on these costs to customers because people will always buy food and other necessities. This, along with its consistent profitability, makes it a relatively safe company to invest in for the long term. However, it may not be worth buying right now near all-time highs.
We are neutral on the stock.
Loblaws Rally Looks Unsustainable from a Technical Perspective
Heres the problem with Loblaw stock: its gone up too much, too quickly. The stock has rallied at a pace that is almost certainly unsustainable. You can see this in the chart below. Loblaw stock was on a slow and steady uptrend until early 2021, which is when the price started rocketing higher. It is now much higher than its 50-month moving average (the line shown in the chart) and even its 50-week moving average.
Many technical analysts will likely agree that uptrends can last a long time but that stocks eventually return to their moving averages. The same will probably hold true for Loblaw at some point – either by trading sideways for a long time or only slowly uptrending (to let the moving averages catch up) or by falling in price.
It may even be starting to lose its momentum already, as it reported earnings last month that beat earnings estimates, but the stock failed to rally on the news. Nonetheless, its still in an overall uptrend, making it dangerous to bet against.
Loblaws Premium Valuation Limits Its Upside Potential
The rally in consumer defensive stocks has led to Loblaw stocks valuation being relatively high, limiting the chance for any more easy, sufficient gains, going forward. Indeed, its valuation metrics are high when compared to five-year averages.
For example, Loblaws forward price-to-free-cash-flow multiple is 17x, 14% higher than its five-year average of 14.92x. Likewise, its forward enterprise-value-to-EBITDA multiple is 8.8x compared to the 8.3x average, and its forward price-to-sales ratio is 0.68x compared to the five-year average of 0.54x.
Lastly, on a trailing-12-months basis, its price-to-book ratio is 3.55x, much higher than the five-year average of 2.46x. Similar to our technical analysis above, Loblaw stock can eventually return to its longer-term averages.
Do Analysts Think Loblaw Stock is a Buy?
According to analysts, Loblaw stock earns a Moderate Buy consensus rating based on three Buys and three Holds assigned in the past three months. The average Loblaw stock price forecast of C$129.33 implies 8.85% upside potential, which isnt much to get excited about. Analyst price targets range from a high of C$154 to a low of C$118.
Conclusion: A Safe Stock with Low Upside Potential
Loblaw has been a solid performer over the years, and it will likely continue being one in the very long term due to its recession-proof business and quantifiable competitive advantage. However, in the short-to-medium term, Loblaw doesnt look as attractive, as both technical analysis and valuation multiples suggest that the stock has gotten ahead of itself. Also, analysts dont see much upside potential, suggesting that most of Loblaws good qualities are priced into the stock.
Alternatively, an interesting way to gain exposure to Loblaw stock while having higher upside potential (according to analysts) would be through shares of George Weston (TSE: WN). George Weston owns a 52.6% stake in Loblaw but has a higher implied upside potential (16.7%). It also has an interesting debt structure that makes it potentially safer than Loblaw.
All in all, while there likely are better opportunities elsewhere in the market, Loblaw stock is still a solid long-term pick for risk-averse investors.