Market Crash: A Million-Dollar Idea to Make a Million

This market crash has brought a lot of opportunities for contrarian investors. Here’s is a value play to make a robust retirement portfolio.

| More on:
Canadian Dollars

Image source: Getty Images

This coronavirus market crash has brought many opportunities for contrarian investors. Despite the recent surge, the TSX Composite Index is still 20% lower against its all-time highs in February.

Notably, this market crash has brought several high-quality stocks to bargain levels. Investors should not look at this crash as a short-term chance in order to time the market. However, this is a worthwhile opportunity to buy high-quality businesses at lucrative levels and hold them for the long term.

Tax-Free Savings Accounts (TFSA) are one of the best tax-efficient investment options available to Canadians. TFSAs will exempt any dividend and capital gain throughout the investment period even at withdrawal.

The maximum individual TFSA contribution limit for 2020 stands at $69,500, and at $139,000 for some millennial couples. Thus, TFSA can be used to build a robust portfolio amid this market crash. Let’s take a look at such an opportunity.

Market crash: High-growth stock at a discounted valuation

BRP Inc (TSX:DOO)(NASDAQ:DOOO) designs and manufactures propulsion systems and power sports vehicles. The stock fell around 60% amid the COVID-19 crash so far this year, which has brought it around $25 levels.

The massive fall in BRP is evident as the virus outbreak has severely hampered consumer discretionary spending. However, this is not the first time BRP stock has seen such a terrible fall. The stock tumbled from $70 to $30 in late 2018, but investors should note that it more than doubled in the subsequent 12 months.

What makes BRP a compelling investment proposition at the moment is its leadership position and a discounted valuation.

The company has a diverse product portfolio that includes all-terrain vehicles, snowmobiles, and watercraft. The famous brands such as Sea-Doo watercraft, Can-Am vehicles, Alumacraft, Ski-Doo, and Lynx snowmobiles fall under its umbrella.

It has a leading market share in watercraft and snowmobiles, giving it all-important—pricing power. BRP has also consistently outplayed the North American Powersports retail growth in the last four years.

The strong performance is also highlighted in BRP’s financials. The company’s revenues and earnings on average increased by approximately 15% in the last three years. The lockdowns caused by the pandemic will indeed have a severe dent on its bottom line this year. However, its long-term growth outlook remains intact.

A $2.6 billion company BRP, operates in more than 120 countries. It derives more than 54% of total revenues from the U.S., while almost 30% comes from internationally and the rest from Canada.

BRP: Valuation

BRP stock is currently trading at a forward price-to-earnings multiple of 7 times. This is significantly inexpensive compared to its five-year historical average of 17 times. Notably, the stock might continue to trade volatile amid the broad market weakness.

However, the stock looks an extremely lucrative bet from the valuation standpoint after the market crash. Thus, buying in multiple installments will ensure that a large chunk gets invested near the lows, which will be fruitful for long-term investing.

Since 2016, BRP stock has returned more than 30% compounded annually till the start of 2020. If one had invested $10,000 in the stock four years back, he or she would have accumulated around $30,400 by January 2020.

However, it would not be prudent to expect such high returns on a consistent basis over the long term. If we assume that a millennial couple invests $139,000 in BRP stock for 10 years, a 25% compounded annual return would generate around $1.3 million. A longer investment period will allow lower returns in order to generate a similar corpus.

Also, even if BRP has delivered more than 30% CAGR in the last four years, our assumption of 25% is still optimistic. However, given its previous recoveries and pent-up demand after the lockdowns are released, the stock could again race to its recent peak.

Investors should note that BRP stock looks particularly lucrative at the moment after its brutal fall amid the market crash. Its innovation, leadership position in the niche market and new product launches will likely make up for lost time.

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.

More on Coronavirus

Dad and son having fun outdoor. Healthy living concept
Dividend Stocks

1 Growth Stock Down 15.8% to Buy Right Now

A growth stock is well-positioned to resume its upward momentum in 2024 following its strong financial results and business momentum.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Stocks for Beginners

3 Things About Couche-Tard Stock Every Smart Investor Knows

Couche-tard stock (TSX:ATD) may be up 30% this year, but look at the leadership and history of the stock to…

Read more »

Plane on runway, aircraft
Coronavirus

Can Air Canada Double in 5 Years? Here’s What it Would Take

Air Canada (TSX:AC) stock has gone nowhere since 2020. Can this change?

Read more »

Senior housing
Stocks for Beginners

Home Improvement Stocks Are Set to Fall (When They Do, Buy These Like Crazy!)

Home improvement stocks are due to drop further in the coming months. But with solid underpinnings for the sector, it…

Read more »

An airplane on a runway
Coronavirus

Forget Boeing: Buy This Magnificent Airline Stock Instead

Boeing (NYSE:BA) stock is looking risky right now, but Air Canada (TSX:AC) stock? Much less so.

Read more »

Man considering whether to sell or buy
Stocks for Beginners

Goeasy Stock: Buy, Sell, or Hold?

When it comes to smart buys, goeasy stock (TSX:GSY) is up there as one of the smartest money can buy.…

Read more »

Woman has an idea
Stocks for Beginners

Here’s Why Magna International Is a No-Brainer Value Stock

Magna stock (TSX:MG) has been climbing back once more, but still offers huge value for long-term minded investors.

Read more »

Aircraft wing plane
Coronavirus

1 TSX Stock Down 60% That Could Bounce Back Stronger

Air Canada (TSX:AC) stock got severely beaten down in the March 2020 COVID crash. Here's why it's probably not going…

Read more »