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Shoppers Drug Mart: A perfect prescription for a contrarian bet

A Shoppers Drug Mart location at Woodbine and O'Connor Avenues in Toronto.

The Globe and Mail/Deborah Baic

If you do any research into Shoppers Drug Mart Corp., you will quickly encounter a wall of bad news that will probably send you elsewhere in pursuit of a good investment.No wonder the share price is still down 25 per cent from its high in 2008, and meandering at levels seen seven long years ago.

But there's something about this former wonder-stock that deserves a second look.

Most investors are focused on the downside – the company's pharmaceutical sales are struggling due to government reforms and rising competition – and ignoring the upside. The stock is cheap, the retail brand dominates in Canada and there is more to Shoppers Drug Mart than just drugs.

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Indeed, most outlets offer a great assortment of just about everything you need to maintain yourself, and your children.

Pharmacy sales at existing stores grew just 0.8 per cent in the second quarter, but so-called front-store sales – which represent more than half of annual revenue – grew 3.4 per cent.

True, that's not much either way, and it suggests that the company's heyday of double-digit earnings growth is not coming back any time soon.

But not every good investment has to grow like Apple, and the best ones are usually bought when expectations are low. In the case of Shoppers, the slow growth is certainly built into the share price.

Consider that the stock now trades at just 15 times estimated earnings.

That is well below the 10-year average price-to-earnings ratio of 24 and its high of 28 (in 2005, when it was firing on all cylinders).

Analyst opinions reflect this new era for the company. The number of lacklustre "hold" recommendations are greater than the number of "buy" recommendations, and even the most bullish price target assumes a gain of just 12 per cent over the next year.

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In other words, this stock is primed for a contrarian bet.

Meanwhile, consider that Shoppers is anything but a financial basket case: Despite the stumbles from shifting government regulations, it remains highly profitable. Annual earnings on a per-share basis have kept climbing over the past five years, as have sales.

Agreed, this isn't the sort of beaten-down stock that looks ready to surge at the first sign of improvement.

But with rock-solid operations, dependable profitability and a brand that will help it dominate Canadian rivals, Shoppers Drug Mart looks like an ideal stock for today's shaky economy.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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