1 Boring Stock With Exciting Upside Potential

Here’s why oft-overlooked Stella-Jones (TSX:SJ) represents an intriguing defensive pick for Canadian investors today.

| More on:
Arrowings ascending on a chalkboard

Image source: Getty Images.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Nowadays, investors often seek the “next big thing” and end up investing in shares of companies that fail to generate decent earnings. A strong tilt toward growth stocks has resulted in a situation where a lot of investors are learning some very painful and expensive lessons.

However, otherwise “boring,” defensive stocks may be better suited as core portfolio holdings for cautious investors. Indeed, those with lower risk tolerances would do well to simplify their portfolios today.

Accordingly, stocks like Stella-Jones (TSX:SJ) offer intriguing upside for such investors. Here’s why this company is on my watch list right now.

Stella-Jones has a prudent business model

This Montreal-based company is engaged in the production and marketing of pressure-treated products made of wood. It provides railway ties and timber to the railroad operators in North America. Moreover, it supplies utility poles to the telecommunication and electrical utilities companies in the continent. Besides these, this company also engages in the production and distribution of pressure-treated residential lumber, which is meant for outdoor purposes.

These products aren’t very attractive. They’re commodity-based and tend to be low margin in nature. Accordingly, it’s understandable why this stock doesn’t make many investors’ watch lists.

However, Stella-Jones has proven itself to be an extremely stable stock during recent volatile times. Taking a look at the company’s five-year stock chart displays this well.

Stella-Jones remains well positioned in U.S. and Canadian markets in terms of wood supply. The efficient procurement team of this company has been instrumental in building strong relationships with the sawmills. Indeed, this has ensured an adequate supply of raw materials for the company at competitive prices.

Given where lumber prices are today, that’s extremely beneficial for shareholders.

First-quarter earnings have been stellar

Stella-Jones has certainly gotten off to a strong start this year. The company’s recent earnings surpassed analyst expectations by a wide margin.

This company recorded EBITDA of $99 million, which represents 57% year-over-year growth. Additionally, Stella-Jones’s management team has increased the company’s EBITDA guidance for the entire year from $385-410 million to $450-480 million, which has trumped the consensus estimate of $391 million. This is bullish for the stock as far as the company’s 2021 outlook is concerned.

Stella-Jones’s management team has indicated its intentions to remain active in the M&A sphere. Via ongoing consolidation in the railroad space, Stella-Jones could further consolidate its competition. Such a move could improve margins over time and continue to grow the company’s already strong market share in its core business.

Analysts believe that Stella-Jones’s current stock price does not reflect the resiliency it showed during the pandemic-induced crisis. Furthermore, it appears that the company’s strong industry fundamentals and stellar balance sheet haven’t been factored into the stock as much as many expected.

Accordingly, I think this “boring” company provides rather exciting long-term potential returns alongside impressive defensive characteristics. I think investors would be remiss to ignore this excellent opportunity today.

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 Chris MacDonald has no position in any of the stocks mentioned.

More on Investing

Man holding magnifying glass over a document
Investing

3 Heavily Shorted TSX Stocks to Watch This Summer

Canadians should monitor heavily shorted TSX stocks like Canada Goose Holdings Inc. (TSX:GOOS)(NYSE:GOOS) in this bear market.

Read more »

Airport and plane
Investing

3 TSX Stocks Set to Take Off With Summer Travel

Canadians should direct their attention to the travel industry and snatch up TSX stocks like Air Canada (TSX:AC) and others…

Read more »

Investing

Young Investors: 3 Canadian Stocks You Can Trust as Inflation Rises

Inflation has soared to new heights, which should spur young investors to snatch up Canadian stocks like Empire Company Ltd.…

Read more »

analyze data
Cryptocurrency

2 Tech Stocks That Benefit From the Decline of Crypto

Crypto's bear market creates opportunities for traditional rivals like Lightspeed (TSX:LSPD)(NYSE:LSPD).

Read more »

Growing plant shoots on coins
Investing

Why This Canadian Growth Stock Could Double Next Thursday

This growth stock is set to soar if market recovery continues and what analysts expect from the company continues.

Read more »

Glass piggy bank
Investing

Market Correction: Boost Your Retirement Fund With These 2 Stocks

The correction in top TSX stocks presents a solid opportunity for investors with long-term financial goals to buy shares of…

Read more »

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

Parents: Here’s Every Credit and Benefit You Can Claim From the CRA

Parents have it hard already, so make sure the CRA is doing everything for you by dishing out payments you're…

Read more »

edit Colleagues chat over ketchup chips
Dividend Stocks

3 Canadian Dividend Stocks to Buy and Hold for Life

These dividend-paying stocks have solid earnings base to support their payouts for decades.

Read more »