The COVID-19 pandemic has created a need for passive income, which can come handy in tough times like these. You need not burn the midnight lamp to get that emergency fund in place.
A smarter way is to make your money work for you. An emergency fund should be easy to liquidate and give real returns that beat inflation and increase your purchasing power.
One stock that meets all these requirements is CGI Group (TSX:GIB.A)(NYSE:GIB). The company is one of the largest IT and business process service provider.
Can CGI be your emergency fund?
CGI Group is a large-cap stock with a market capitalization of $21 billion. On average, over 875,000 CGI shares are traded every day. The stock meets the liquidity requirement as you can sell the share anytime for the market price.
Apart from liquidity, you want the money you set aside for the emergency fund to be safe from market declines. One major factor that makes CGI an ideal choice for an emergency fund is its low risk.
Until 2007, the stock reported many ups and downs as its 50, and 200-day moving averages crossed paths.
The stock started on a long-term growth path in 2009. Since then, its 50-day moving average has been higher than its 200-day moving average. Moreover, the stock has been making new 52-week highs, thereby increasing its 50 and 200-day moving averages.
In the last 10 years, CGI stock has grown on the back of strong fundamentals as its adjusted EBIT and operating cash flow rose steadily. Before the pandemic, the stock more than doubled in five years and grew 700% in 10 years.
If you had invested $10,000 in January 2010, you would have earned $70,000 by January 2020, generating an average annual return of 23%. Given that Canada’s last 10-year inflation has hovered around 1.5-2.5%, a 23% annual return would have increased your purchasing power tenfold.
CGI stock is down for the first time in 10 years
For the first time in over 10 years, CGI stock fell below its 200-day moving average in February and March. The decline came as investors cashed out their investments to prepare for the pandemic-driven crisis.
When the economy falls and the future is clouded, cash is king. The stock has partially recovered and moved above its 50-day moving average.
It is trading at 20 times its earnings, which is lower than its peer Accenture’s valuation of 27. This sudden decline in CGI’s stock price is not backed by fundamentals but by market fears.
Hence, the current price is not sustainable, and it will grow as value investors buy the stock at its current valuation.
CGI is not immune to the impact of COVID-19. Its bookings declined 14.5% year-over-year in the second quarter of fiscal 2020 as customers delayed their contracts.
However, it’s not right to look at CGI’s quarterly bookings or revenue as they could change significantly depending on the timing of contract wins and the size of deals.
The company earns 29% of its revenue from the manufacturing, retail, and distribution (MRD) sector, which has been significantly hit by the pandemic. However, its remaining revenue comes from government, financial services, healthcare, utilities, and communications sectors that were not affected greatly by the crisis.
Moreover, most of its revenue is recurring in nature, which means the crisis will little change its revenue. Once the pandemic cools down, CGI will close the delayed contracts.
CGI has the potential to grow in the next 10 years
Every crisis brings revolutionary changes in the business environment. The 2009 financial crisis made companies more attentive to their leverage. The pandemic crisis has made a move to the cloud inevitable.
The 5G and artificial intelligence revolution will make digitization necessary for survival. CGI is well positioned to tap this trend. Its stock has the potential to grow another 700% for the next 10 years.
Investing $10,000 in CGI today will help you beat inflation and generate at least $2,000 every year in passive income with minimum risk. You will not regret buying this stock 10 years from now.