2 Toxic Canadian Stocks I Wouldn’t Touch With a Barge Pole

Here are two mediocre businesses that I wouldn’t touch, even if they were far cheaper. One such stock is IGM Financial Inc. (TSX:IGM).

| More on:

As a value investor, I’m always on the hunt for the next bargain that the general public may be punishing. It’s not at all an easy task, though there are value traps scattered around the TSX, and if you’re not careful, you may find yourself buying a “cigar butt” that may have no puffs left to smoke.

Sure, it may seem like you’re paying next to nothing for a particular stock, but if you’re not buying quality, you could be risking the health of your portfolio by accumulating too many cigar butts.

Here are two toxic stocks that I’d avoid, no matter how cheap they get, because I believe their margins of safety are nothing more than a mirage, and their siren songs may be calling to value investors.

As the brilliant Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” So, keep quality in mind when you do your bargain hunting for some of the TSX’s seemingly best “deals.”

IGM Financial Inc. (TSX:IGM)

IGM Financial has a juicy 5.13% yield and trades at a 13.46 trailing P/E. It’s a cheap stock, without a doubt, but over the next few years, I think the headwinds are far too great, such that I’ve been avoiding this stock like the plague.

The company offers a wide array of mutual funds, wealth management services, and various other financial products. You may have heard of the firms under the IGM umbrella: Mackenzie Financial and Investors Group, both of which offer investment services and mutual funds, which charge obscenely high fees that hover around the 2.8% mark.

That’s a very high price to pay for seemingly average performance that’s anything but commendable. Investors Group also has a very poor reputation in the past for trapping clients with deferred sales charges — something that simply isn’t possible with regulators cracking down on the “shady” Canadian mutual fund industry.

With more investment instruments available to Canadian investors, there’s no reason to be paying high fees for sub-par mutual funds. As the financial literacy of the average Canadian increases, they’ll quickly realize that they would’ve been just fine with dirt-cheap index funds offered by their banks from the start.

You’ve probably seen the commercials by Questrade taking shots at high-fee mutual fund firms. “It’s not a game. It’s my retirement.” Such commercials aren’t just promoting Questrade’s platform; they’re shedding light on a major problem that Canadians have been oblivious to for far too long.

Just have a look at IGM’s revenue and earnings growth over the last decade. It’s pretty much been stagnant. The high-fee fund industry is dying, and IGM will likely take a huge long-term hit.

Canadian Western Bank (TSX:CWB)

Canadian Western Bank is a regional bank which has enjoyed a considerable amount of momentum of late, but before you ride the wave higher, you should know that the stock isn’t even “cheap” when compared to the Big Six, all of which have higher yields and are far better value for a long-term investor.

Canadian Western Bank, as the name suggests, operates primarily in western Canada, and thus is heavily exposed to the struggling province of Alberta. Sure, the Albertan economy may be poised to enjoy a rebound in time, but it still has plenty of loans to many Albertan borrowers, many of whom are still under financial stress.

At current levels, I’d avoid Canadian Western Bank and its below-average 2.43% dividend yield, which is far below what you’ll get with the 3-4.5%-yielding Big Six banks that I believe are much lower-risk plays. Sure, substantial upside still exists as Alberta gets back on the road to recovery, but I don’t think the elevated risk profile is suitable for the average investor seeking to bolster the core of their portfolio.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Investing

Oil pumps against sunset
Energy Stocks

Is it a Good Time to Buy in the Energy Sector?

Boosted by a very bullish supply/demand environment, energy stocks like Canadian Natural Resources and Tourmaline have much further to go.

Read more »

Investing

2 Stocks to Buy Offering Better Value Than Air Canada

Air Canada has been a popular stock for years, but despite its low price, these two picks are much better…

Read more »

money cash dividends
Investing

How to Make $373/Month in Passive Income With These 2 TSX Stocks

You could bring in passive income of $4,482 annually, or $373 per month!

Read more »

clock time
Stocks for Beginners

3 Stocks to Start Investing Today

Looking for a set of stocks to start investing today? Here are some great options that offer growth and income…

Read more »

investment research
Dividend Stocks

Young Investors: Create Cash Flow With This Top Dividend Stock

If you're a young investor looking for cash flow, you need a strong dividend stock and solid banking program designed…

Read more »

Illustration of bull and bear
Investing

Is the Stock Market Selloff Over?

Throughout this week, many stocks have been gaining value and rebounding from their lows. So, is the stock market selloff…

Read more »

potted green plant grows up in arrow shape
Investing

Retirement 101: How Investors Can Turn $20,000 Into $500,000 in 25 Years

These top TSX dividend stocks have made some investors rich.

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.
Dividend Stocks

3 Superb Dividend Stocks I’m Ready to Buy

The market is full of great options for income-seeking investors. Here are three superb dividend stocks to buy now.

Read more »