Investing after the COVID-19 pandemic could be an interesting wealth-creation game. Some entire industries remain heavily battered after the 2020 market crash, yet selected stocks have soared. This seems like the best time in a decade to invest the maximum contribution of $6,000 in a Tax-Free Savings Account (TFSA). Even better, you could aim to max out to the cumulative contribution room to $69,500 in 2020 (if you had some room left) and take great advantage of a beaten-down stock market this year.
Carefully selecting what to buy with your TFSA contributions is more important than ever right now.
Technology stocks are likely to continue to lead the pack as the market rebounds. A momentum play could yield quicker positive results if you buy into the hot names that enjoy the limelight right now.
Darling Shopify stock has been generous this year, as it recorded new all-time highs. Be careful though; tickers that have rallied so much could be ripe for profit-taking, consolidation, or an outright correction. I would hold on to an old position, but new money could be best placed somewhere else.
Where to invest new TFSA contributions right now?
The COVID-19 pandemic has altered our everyday lives; even our investing approaches need adjustments now.
We used to look so much into profitability, revenue, and earnings-growth projections during stock selection. Valuation multiples like price-to-forward-earnings (P/E) ratios mattered a lot when evaluating potential investment candidates.
Unfortunately, high uncertainty during the COVID-19 pandemic and potential shifts in consumer behaviour after the health crisis require that we look deeper into the companies. Most companies have already withdrawn their earnings guidance for this year. Basing investment actions on mechanical earnings projections requires wide margins of error during periods of high uncertainty.
The truth is, earnings could be lower for most industries this year. I would still buy shares in companies that look well positioned to survive the pandemic. It’s either they have relatively unaffected operations, or they have very good prospects to rebuild their balance sheets quickly when normalcy returns.
Two important groups of investment candidates stick out right now.
Stocks with strong cash flow positive operations
The ability to consistently generate dependable and reliably positive cash flows and to sustain regular dividend payments are rare attributes that should be highly priced going forward.
A good number of tech stocks and communications players fit into this category; so do Canadian banks and selected real estate investment trusts (REITs).
Kinaxis, Enghouse Systems, and Open Text are good names to look at. South of the border, behemoths Microsoft and Alphabet are doing wonders, although the latter reported its slowest (albeit double-digit) revenue growth rate for the most recent quarter.
Toronto-Dominion Bank management vowed not to touch the dividend, which yields a rare 5.5% annually right now.
Firms with solid rebuilding prospects
These companies may have taken heavy blows from the COVID-19 pandemic. Their revenues, earnings, and cash flows are in shambles. But they have very strong rebuilding prospects. They either had ample liquidity going into the crisis or deep and vibrant credit lines with bankers. Their operations will spring back to profitability in relatively fewer quarters post the pandemic.
These stocks were heavily beaten down during the recent market crash. Many REITs could fall into this category, and their current income yields are too tempting to ignore. Actually, REITs could never be this cheap again this decade. Some better-managed and relatively more liquid airlines also fall into this category.
Chorus Aviation has already shored up its takeover defences. The company announced a contingent shareholder rights issue at a 50% discount to the prevailing market price. Chorus’s board senses that many opportunistic contrarian investors could be tempted to snatch this jewel from current shareholders for cheap during this down market. Air Canada is much more liquid than it was one crisis ago. I would bet that this national strategic asset could still be bailed out if necessary.
I like that narrative. That said, take note that this category’s candidates are higher-risk investments, and some may require longer holding periods for the outsized returns to compound.
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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.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Brian Paradza has no position in any of the stocks mentioned. David Gardner owns shares of Alphabet (A shares) and Alphabet (C shares). Tom Gardner owns shares of Alphabet (A shares), Alphabet (C shares), and Shopify. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, Shopify, and Shopify. The Motley Fool recommends Enghouse Systems Ltd., KINAXIS INC, Open Text, and OPEN TEXT CORP and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft.