As we head into August, global markets are starting to look overheated. U.S. markets have more or less returned to their highs witnessed before COVID-19, and Canadian markets aren’t too far behind. The NASDAQ, for its part, was already up 15% for the year as of this writing.
In a market like this, it’s wise to proceed with caution. The economic fallout from COVID-19 is still yet to be determined. While the U.S. and Canada have both posted encouraging jobs numbers, it’s important to note that big job gains don’t mean we’re back to normal unemployment levels. Even after adding nearly a million jobs in June, Canada still had a whopping 12.3% unemployment rate.
Amid this environment, it’s wise to tread carefully with stocks. A slower than expected recovery could easily trigger another pullback in equities. And the truth is that many categories of equities are getting pretty pricey. As I wrote in a recent article, stocks perceived as COVID-proof are starting to get expensive. While it’s normal for investors to seek shelter from a storm, they might be paying too much for stocks perceived as safe.
On the other hand, stocks that are still down may stand a real chance at recovery. The following are three that look promising heading into August.
Enbridge
Enbridge Inc (TSX: ENB)(NYSE: ENB) is an energy stock that got hit hard in the COVID-19 market crash. It fell over 30% in less than a month. Later, the company released an earnings report that did show a $1.4 billion loss for the first quarter.
However, the GAAP loss included a number of non-cash and non-recurring factors. Adjusted earnings came in at $1.7 billion, while cash from operating activities came in at $2.8 billion. These were both encouraging figures. They weren’t surprising either. Enbridge works off long-term contracts, so short-term weakness in oil won’t hurt its revenue.
Fortis
Fortis Inc (TSX: FTS)(NYSE: FTS) is a very reliable Canadian dividend stock. While it wasn’t a massive casualty of the COVID-19 market crash, it remains down 1.66% for the year, which may make the stock an attractive buy. Its trailing P/E ratio is 14, which is fairly low for a TSX stock in 2020. The projected forward P/E ratio based on Thomson Reuters estimates is higher at 18. However, those estimates could be wrong.
In the first quarter, Fortis’ earnings were basically flat at $312 million. EPS declined a little because of equity sales. While that’s a concern, Fortis is investing the proceeds of selling shares into projects that aim to fuel growth. A pretty solid and arguably undervalued company.
TD Bank
The Toronto-Dominion Bank (TSX: TD)(NYSE: TD) is a Canadian bank that got beaten down in the COVID-19 market crash. There’s no denying that its recent earnings numbers were ugly, with net income down 54% year over year.
However, that decline in earnings was mostly due to increases in PCLs — that is, reserves for expected loan losses. If the expected losses don’t materialize, TD will be able to reverse its PCLs in the future. That will result in a big earnings jump.
So far, there’s no reason to expect those losses not to materialize. However, it’s been widely reported that Warren Buffett thinks the banks are in good shape. He put his money where his mouth was by investing $800 million in Bank of America.
If you think Buffett is right about BoA, then you might want to look at TD. It’s the Canadian bank most similar to BoA due to its heavy exposure to U.S. retail banking.
