The Motley Fool

What Should You Buy at the TSX Index’s All-Time High?

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If I told you on Christmas Eve that the markets would be at all-time highs in April, you would have thought I was a fool as such a call implied a four-month return of around 26%.

Today, the markets aren’t just roaring past all-time highs; many pundits are throwing around terms like “market melt-up” just months after “recession” was the buzzword on the Street.

While we could be in for further upside surprises as the shorts continue to run to the hills, it’s crucial for investors to maintain discipline, as the rapid change in investor sentiment is likely to continue shifting at a rapid pace in the months ahead. As we saw in early 2018, the meltup quickly turned into a meltdown, and those beginners who followed the herd were the ones who were left holding the bag as the rally overextended itself.

For disciplined Fools, such excessively volatile moves are magnificent opportunities to make money with Warren Buffett’s old-fashioned contrarian investing strategy. When corrections happen, you’ll want to keep nibbling away at your favourite on-sale stocks when they’re out of favour, and when meltups happen, you may want to tread cautiously and trim your overly frothy holdings, because the pendulum of investor psychology tends to swings well past the point of what would be deemed as market efficiency.

While stocks as a whole aren’t screaming bargains at today’s level, they aren’t absurdly expensive either. And should the mother of all short squeezes be in the cards, you’re probably going to want to own the most-hated stocks out there, because once the shorts run for cover, a huge upside correction could be in store for shareholders who stay the course.

Consider much-hated stocks like Enbridge (TSX:ENB)(NYSE:ENB), which has been one of Canada’s most-shorted stocks over the past year. The $100 billion pipeline juggernaut has been treading water for nearly five years now, but most recently, the stock has begun to pick up momentum again following the release of an earnings report that saw encouraging, albeit subtle improvements.

Fourth-quarter distributable cash flow came in at $1.9 billion, up nearly 12% year over year, which was great news for a company that has been harshly criticized for continuing to keep its “dividend raise promise” to investors in spite of the financial constraints that presented themselves since oil’s implosion.

On the growth front, Enbridge is continuing to pile money into projects. The Line 3 Replacement, a significant catalyst and significant source of growth, has been pushed out, but as the Canadian energy environment brightens up with its new pro-energy premier, we could witness a sizable short squeeze as the bearish thesis begins to weaken further.

Enbridge recently announced nearly $2 billion in further growth projects in Q4, and although the company is in a financially tight position, I think it no longer has its back against the wall.

Should cash flows continue on the uptrend, Enbridge may be a prudent way to get your income (what a bountiful 6% yield!) and quick gains at the expense of the shorts who are the ones who’ll have their backs against the wall as the up moves and that whopping dividend become too much to handle.

Don’t be afraid of the shorts. Have conviction and they’ll serve as nothing for than fuel for a rally!

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

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