There is a massive discrepancy in the stock market between the haves and the have nots. Value stocks, largely consisting of energy, financial, restaurants, and REITs, have been bashed hard since the end of February. Technology, consumer staples, and regulated utilities have done quite well.
If you are a value investor, the grounds are rife with deals these days. You have to have a strong stomach to get into these companies, though, as their weaknesses look to persist for the foreseeable future. For those of you who like digging around in the trash, I will pull out two smelly stocks that might have a bright future. Buy these in your TFSA, and you could double your money tax-free.
The restaurant gem
After pushing aside some dirt, I managed to uncover a previous high flyer that fell hard and fast. MTY Food Group (TSX:MTY) was a rising star for years, trading at a high multiple and sporting a growing dividend. Well, the dividend fell to zero, and the stock is more than 50% below its highs.
Since its businesses are largely situated in the wastelands that were once shopping malls, MTY has been hit hard. Its restaurants covered a large territory across Canada and the United States, a level of diversification that should have mitigated any regional impacts to its earnings. Unfortunately, an epic pandemic hammered it all at once in a way no one could have foreseen.
There is a bright spot, though. All this stock needs is for the economy to open up. It is hard to believe that we will be living this way forever. Indeed, many countries, provinces, and states have already begun to gingerly open their doors. It wouldn’t take much for this stock to double.
Landlords in pain
The mall and office owners are feeling the pain of this crushing pandemic. Working from home is now the norm. Many are even wondering if this work-from-home style of operation will become more widespread, reducing demand for office spaces. Malls are abandoned, and the stores within are starting to go bust, increasing fears that brick-and-mortar’s demise has been hastened.
Along with other landowners, RioCan REIT (TSX:REI.UN) got whacked by the lockdown tsunami. Furthermore, its diversification was of little comfort when the entire country got shut down. It also faces another challenge. About 50% of its properties are located in Ontario. That province will be slower to open than other regions of Canada.
A couple of facts should comfort investors, though. Canada, even Ontario, is opening up. It is also comforting that the CEO has openly supported the 9% distribution. Even though the share price has come up a bit from its lows, it is likely that there is still another 50% or more to go in the stock once markets start to open up.
If RioCan gets close to its highs, you are looking at a potential capital gain of between 60% and 100% depending on your average cost. Adding in the distribution, which is tax-free in a TFSA, you have an extra 9% at today’s price that’s paid out monthly.
The bottom line
The pandemic hammered both of these stocks. They were thrown out because of the narrative that offices and malls are under threat of going out of business. There is risk in the narrative, which is why you can still pick up these stocks at reduced levels. In a TFSA, there is a very good chance you could double your money on a total-return basis should the economy open up and recover.
However, it is very likely that, when economies open up, these stocks will have excellent upside. This could happen within the next year, so it is not even that long a hold to potentially double your money. In the meantime, you can collect some distributions from RioCan and potentially from MTY if it starts to pay its dividend once again.