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Canadian Top Picks: 2 Undervalued Stocks That Could Crush the TSX Index

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The TSX Index looks to be running out of steam going into May. Although the market waters have gotten a tad rougher, now probably isn’t a good time to buy into the whole “sell in May and go away” strategy that hogs the headlines every single year, regardless of the circumstances. With growth stocks dragging the broader markets lower on Tuesday, I’d treat the modest pullback as a chance to scoop up the already cheap Canadian stocks out there that are well equipped to give the TSX a good run for its money into year-end.

Led higher by a massive commodity recovery, the TSX is crushing it thus far in 2021. But as the big commodity rally runs out of steam, it’s the neglected reopening names that could be in a spot to shine the brightest in the second half.

Canadian top picks to beat the TSX Index

Over the next 18 months, I’d bet on my Canadian top picks in Alimentation Couche-Tard (TSX:ATD.B) and Canada Goose (TSX:GOOS)(NYSE:GOOS), which, I think will outdo the TSX as the economy reopens, possibly for good this time.

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Couche-Tard is a convenience retailer facing an identity issue with shareholders following its failed acquisition of French grocery giant Carrefour. The stock is fresh off a correction and could be in a spot to soar once management is ready to pull the trigger on an acquisition.

The company’s cash pile is swelling over the years, and its next acquisition could be its biggest yet. At this juncture, it appears all bets are on a grocery deal, and that’s weighed heavily on the stock. With a decent quarter in the books and a post-pandemic bounce back in fuel sales to be expected, Couche-Tard looks way too cheap at current levels.

The company trades at a ridiculously low 8.9 times EV/EBITDA, considerably lower than the stock’s five-year historical average of 11.32. For a firm that’s averaged 25% in earnings growth over the last three years, such a multiple, I believe, is ridiculous.

Clearly, investors doubt that Couche can post such growth over the next three years, but I beg to differ. Once Couche gets back on the M&A track, I think the company could double its net profit in as little as five years, as management makes good on its long-term strategic plan.

Couche is one of the most misunderstood retailers, not only in Canada but the world. Once more light is shed on the growth opportunity at hand, I suspect shares could be re-valued to the upside in a big way. It’s tough to remember the last time the stock was this out of favour. With the bar set to the floor, I think the margin of safety couldn’t be wider for the c-store giant that probably won’t stay depressed for very long, not as management goes on the hunt for its next big acquisition.

Canada Goose

Canada Goose is a luxury parka maker that saw a drastic drop-off in sales back in early 2020 when it seemed like the coronavirus would send us into an economic depression. The “d” word (depression) was thrown around quite a bit last year, but since the Fed stepped in, the keyword to describe the state of the economy now starts with the letter “b” for boom.

With built-up savings likely to put expensed on discretionary goods, Canada Goose could be one of the bigger beneficiaries in the early stages of this economic expansion. That’s why it’s one of my Canadian top picks to beat the TSX for the rest of 2021.

The company has already seen demand pick up of late, even with lockdowns still in place in many parts of the world. With an incredible omnichannel presence, I suspect the Goose will fly to new highs at some point over the next 18 months.

CEO Dani Reiss is one of the best managers out there. His firm had done everything right, even as the pandemic delivered a blow to its business. These days, the tides are finally turning in the Goose’s favour, and there’s no telling just how high it’ll fly once the wind to its back.

If you're looking for opportunities in this uncertain market, I'd encourage you to consider the following:

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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.

Fool contributor Joey Frenette owns shares of ALIMENTATION COUCHE-TARD INC. The Motley Fool owns shares of and recommends ALIMENTATION COUCHE-TARD INC. The Motley Fool recommends Canada Goose Holdings.

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