High-quality, cash-rich stocks are on sale on the TSX right now. The recent market crash is a perfect chance for Tax-Free Savings Account (TFSA) investors to put their 2020, $6,000 contribution to work. Today, you can maximize returns by buying stocks at a bargain and paying no tax on the capital gains, interest, or dividends.
Since the TSX remains volatile, I suggest looking for stocks with cash-rich balance sheets and the capacity to grow, even during a recession. Split your $6,000 TFSA contribution between these two cash-rich stocks and enjoy the wonder of compounding returns before your eyes.
This cash-rich stock is a compounding machine
If you are dreaming of an investment that could reach the stars, look no further than Constellation Software (TSX:CSU). This company has a unique investment approach. It acquires good software-as-a-service (SaaS) businesses, injects capital, coaching, and infrastructure, and then lets them flourish to become exceptional cash-flowing businesses. That cash flow is then reinvested back into new SaaS acquisitions, and the process starts again.
Consequently, this business model has created a steadily growing, cash-compounding machine. In fact, over 70% of Constellation’s revenues are re-occurring through licensing, maintenance, or other re-occurring services. In addition, its investments are diversified and exposed to a wide array of industries and sectors. This gives Constellation a relatively stable, predictable business platform.
Constellation is even more interesting, because of its solid balance sheet. It is a cash-rich stock. It has a cushy $316 million of cash on its books. This provides a safety cushion due to potential COVID-19 uncertainty, and it provides an opportunity to capitalize in a recession.
There are literally thousands of SaaS businesses across the globe that Constellation could target. An economic crisis is a perfect opportunity for Constellation to hunt down good software businesses at bargain valuations.
Constellation is one of the best-performing stocks on the TSX. Over the past 10 years, it has returned a mind-blowing 3,052% total return for shareholders. If you invested $3,000 in Constellation 10 years ago, your 68 shares would be worth around $92,381 today. While that type of growth (40% annual return) might not be reasonable today, 15-20% annual growth is not an unreasonable expectation for this stock.
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Own best-in-class businesses with this TSX stock
Brookfield Business Partners (TSX:BBU.UN)(NYSE:BBU) is another cash-rich stock to consider for your TFSA. It is a very unique subsidiary of Brookfield Asset Management.
Rather than hard assets, BBU manages a private equity portfolio of industrial, corporate, and infrastructure-service businesses. BBU acquires distressed or underperforming businesses, injects capital, restructures the operations, and turns them into market-leading companies.
Over the years, BBU has recycled smaller businesses and upgraded its portfolio into a number of very high-quality businesses. Some of these include an Australian private hospital operator, a global nuclear services provider, and a South American water and sewage services company.
You need to take a very long-term perspective with BBU. It is building businesses for the long haul. As a consequence, quarter-to-quarter results can be choppy. Yet its long-term strategy has started to pay off.
In 2019, BBU improved EBITDA and FFO per unit year over year by 44% and 39%, respectively. Over the past three years Brookfield has seen its FFO more than triple.
BBU is a cash-rich stock with $274 million of cash on its balance sheet and an available $2.1 billion of undrawn credit capacity. An economic downturn would be an excellent opportunity for BBU. Over this year, there will likely be many distressed companies looking for much-needed liquidity.
As a result, this trend could rapidly fuel BBU’s long-term acquisition pipeline. Considering the opportunities, the company is trading cheaply today at about a 35% discount to estimated intrinsic value. Today is a great time to take advantage of this cheap stock with lots of growth ahead.
The Foolish takeaway
The markets are volatile, and short-term value is available if you are brave. Split your $6,000 TFSA contribution between these two cash-rich stocks and enjoy a lifetime of compounding returns in your portfolio!
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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 Robin Brown owns shares of Brookfield Asset Management and Brookfield Business Partners L.P. Limited Partnership Units. The Motley Fool owns shares of and recommends Brookfield Asset Management and Constellation Software. The Motley Fool recommends BROOKFIELD ASSET MANAGEMENT INC. CL.A LV.