The TSX Index has been on a tear this year, up nearly 15% year to date alongside the S&P 500. The incredible strength in commodities and financials has fuelled the first-half rally.
While there’s no telling if such incredibly strong sectors will be able to propel the broader indices much higher in the second half of 2021, I still think self-guided stock pickers can put the broader markets to shame with the careful selection of undervalued securities, specifically the less-loved reopening plays and less-favoured energy stocks that haven’t participated in the latest energy rally to the fullest extent.
Without further ado, consider Restaurant Brands International (TSX:QSR)(NYSE:QSR) and Constellation Software (TSX:CSU), two cheap names that I believe can help Canadian investors beat the TSX over the next year.
Restaurant Brands International: A restaurant kingpin to help you beat the TSX
Restaurant Brands is a beaten-down fast-food firm behind Burger King, Tim Hortons, and Popeyes Louisiana Kitchen. The stock is up a very decent 10% year to date. Still, shares remain off 20% from their all-time highs hit in 2019. I think there’s a high chance that QSR stock will hit its highs just north of $100 over the next few years, as dining room restrictions lift, and the company looks to reap the rewards of its relentless modernization investments.
Amid the pandemic, the company had made major strides in the mobile, delivery, and drive-thru fronts. With fresh branding at Burger King and innovative menu items being pumped out of the pipeline (think the Nashville Hot Chicken Sandwich), I wouldn’t at all be surprised to see QSR stock post a full recovery, even if COVID-19 restrictions were to return later in the year to curb a potential fourth wave.
Restaurant Brands sports an above-average dividend yield at just north of 3% and a below-average valuation, with shares trading at 6.4 times sales and nine times book, both of which are below the restaurant industry averages of 7.4 times and 9.6 times, respectively.
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Constellation Software: Beating the market with less volatility
Constellation Software (TSX:CSU) is the epitome of a smart-beta stock. A wonderful business with considerable momentum, solid growth prospects, and a below-average beta.
The diversified software company that’s grown through prudent M&A has handsomely crushed the TSX for many years, thanks to its incredible managers who know value when they see it in the small-cap Canadian tech scene. The folks at Constellation truly are worth paying up for. Although the company is now quite sizeable with its nearly $40 billion market cap, I still think the company has plenty of market-beating days ahead.
Over the past five years, CSU stock has more than tripled up (236% return), while the broader TSX Index posted a mediocre 42% return. Not only did Constellation beat the market, but it did so with far less volatility. This goes to show that you don’t need to take excessive risks of stomach-churning levels of volatility to get a shot at market-beating gains.
Constellation stock is fresh off a 10% correction amid the broader souring of growth and tech names. I think the pullback is nothing more than a great entry point for long-term thinkers.
With a 0.74 beta, Constellation stock is a less-risky, long-term growth pick for Canadian investors looking to defy the “high-risk, high-reward” law of investments. Indeed, Constellation breaks the rules. So, Foolish rule breakers looking to beat the TSX, do take note!
Speaking of wonderful businesses, check out these picks curated by the team here at the Motley Fool Canada.
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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 Restaurant Brands International. The Motley Fool recommends RESTAURANT BRANDS INTERNATIONAL INC. The Motley Fool owns shares of and recommends Constellation Software.