If you understand stocks, you know one thing: a decline is inevitable. Why do stocks fall? There are many reasons for it. No business comes without risk. Whenever the business surroundings bend towards the risk, the stock falls. Sometimes a stock falls just because there is a lack of liquidity in the market. Something like this happened in July, when the Canada Revenue Agency (CRA) slashed the Canada Recovery Benefit (CRB) from $500 to $300.
When the liquidity dries
The CRB was free money that the government injected into the economy during the pandemic. Some individuals used this free money and invested in stocks. Hence, the stock market surged even when the economy collapsed. Now with a lower CRB, the stock market saw a correction, as people cashed out to fill the $200 gap.
Canada is seeing the return of employment, with the addition of 231,000 jobs in June and 94,000 in July. Rising employment will see the return of liquidity in the hands of investors, which will once again drive the stock market rally. The trick is to identify the stock where most investors will invest in the future. For instance, why do you buy gold? You expect the gold price to surge so that you can sell it at a higher price and earn a profit. Similar is the case with stocks.
A Peter Lynch says, “Whenever you invest in any company, you’re looking for its market cap to rise. This can’t happen unless buyers are paying higher prices for the shares, making your investment more valuable.” For this, you should buy stocks with growth potential at the dip.
I have identified three stocks that corrected as much as 25% in the last two months and could now ride the recovery rally.
Oil stocks
July 5 was the day oil stocks began a downtrend after two Organization of the Petroleum Exporting Countries (OPEC) entered a dispute over oil production. Moreover, rising Delta variant cases stalled economic recovery. The oil price fell. But Canadian oil stocks took a bigger hit, as the United States raised concerns about the carbon emissions from oil sands.
Canada has the largest oil sands reserves. Stocks of Suncor Energy (TSX:SU)(NYSE:SU) and Cenovus Energy (TSX:CVE)(NYSE:CVE) fell 21% and 20.6%, respectively. The two, along with other oil companies, announced a $75 billion initiative to zero out greenhouse gases from oil sands operations by 2050. This additional cost will impact their profits, as they can’t pass on the cost to customers.
Oil is a commodity, and its price is determined by global market demand and supply. The only way oil companies differentiate themselves is by reducing their cost. This helps them remain profitable even when the oil price falls. This is a concern for a later date. Right now, the oil industry is at the cusp of an upturn, as factories reopen and air travel restrictions ease. This recovery could last for the next nine to 12 months. And that is where the recovery rally lies.
Suncor and Cenovus stocks surged 94% and 145%, riding the recovery rally from November 2020 to June 2021. I expect these stocks to return to the pre-pandemic levels of $42 and $13.17 in the next 12 months, representing upside of 73% and 33%, respectively. These stocks are a buy at their current dip.
Transat A.T. stock
International tour operator Transat A.T. (TSX:TRZ) is another stock to benefit from the easing of travel restrictions. The stock lost 76% of its value during the pandemic peak, as extended lockdowns put the entire tourism and hospitality industry in a fix. The stock took another hit after its acquisition by Air Canada hit a dead end in February. After 16 months, non-essential travel is returning, and Air Canada is seeing pent-up travel demand from the Atlantic, and most of it is leisure travel.
This pent-up demand will benefit Transat, as it partners with Air Canada on leisure travel. Transat stock has corrected 25% since mid-June on rising Delta variant cases. But this won’t always be the case, and the $700 million government bailout will save it from bankruptcy. I expect the stock to surge to its June high of $7.26, representing 34% upside.
