Is The Market Bottom Close? 2 Stocks to Buy When It Arrives

Bottom fishing offers great investment opportunities. The Extendicare stock and MEG Energy stock are trading at a discount. Shares of the companies are poised to produce higher returns when both emerge from the market bottom.

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The April 2020 rally is giving investors a false sense of security. Although the Toronto Stock Market (TSX) is snapping back from the most violent market crash ever, it’s not out of the woods yet. A deep recession is coming, and at the TSX could hit the market bottom.

Stock prices usually begin to trend upward when the market bottoms. This market behaviour could unlock huge profits for investors who have bought stocks at rock-bottom prices.

While the tempest that is COVID-19 has brought uncertainty to the market, it doesn’t mean there are no more buying opportunities. Extendicare (TSX:EXE) and MEG Energy (TSX:MEG) are among the stocks that could deliver significant gains when the market returns to pre-corona normal.

Vital service post-corona

Extendicare is a leader in providing long-term care (LTC), retirement living, and home health care services in Canada. This $575.77 million company is at the forefront of the fight against COVID-19. Senior citizens under its care are the most susceptible to the deadly coronavirus.

Many in the senior leadership team at Extendicare, including President and CEO Dr. Michael Guerriere, were once frontline caregivers. Their first-hand experience helps the company meet the challenges of delivering health care during this pandemic.

An Incident Management System (IMS) team was mobilized to develop and implement strategies to manage the virus threat. Extendicare’s business is well positioned to flourish even more in the aftermath of COVID-19.

Its share price is losing by 22.3% year to date, but analysts are forecasting the current price of $6.45 to climb by 55% to $10 in the next 12 months. Extendicare is offering a 7.4% dividend, although its Dividend Reinvestment Program (DRIP) is temporarily suspended.

Obstructed breakout

The share price of MEG sank 78.6% in 2020. From $7.34 on January 2, 2020, the stock fell to $1.57 on April 1, 2020. As of April 23, 2020, however, MEG rallied 83.4% and climbed to $2.88.

Moody’s Investors Service recently downgraded MEG’s rating from stable to negative. The rating agency sees MEG’s lower cash flow generation and weaker credit metrics to possibly persist through 2021. Factors that would merit an upgrade are retained cash flow-to-debt above 25% and positive free cash flow.

So far, MEG’s liquidity position is good. This $862.58 Calgary-based company has about $45 million in cash reserves and an undrawn $800 million revolving credit facility as of December 31, 2019.

Aside from the coronavirus, falling oil prices, declining asset prices, and deteriorating global economic outlook are gravely affecting the oil and gas E&P industry. Analysts are forecasting MEG to rise by 177.8% to $8 in the next 12 months when the industry shocks are over.

Bottom fishing

Given the anxiety during a pandemic, identifying the market bottom is very difficult. The TSX could have reached the bottom in March — or is still in the market bottoming phase. But emerging from a market bottom could bring enormous financial rewards.

In case you want to go bottom fishing, make sure you understand the risks. Only those with high-risk appetites and can afford to absorb the losses will fish in a wild and woolly market.

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 Christopher Liew has no position in any of the stocks mentioned.

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