1 Stock to Buy — and 1 Stock to Avoid

If you are new to the world of stock market investing, it’s crucial to be careful of where you choose to invest your money to get a good start.

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The S&P/TSX Composite Index continues to hit new all-time highs as the year comes to a close. At writing, the Canadian benchmark index is up by 23.13% year to date, soaring ever higher than before. The pandemic gave a reality check to many Canadians and spurred them into action when it came to making use of their savings instead of letting it sit idly in their accounts.

Investing in the stock market is proving itself to be an excellent way for Canadians to grow their wealth at a faster pace than through fixed-income assets and interest income through high-interest savings accounts. If you’re just starting investing, it is crucial to understand how to make well-informed decisions regarding which stock you should buy.

Investing in undervalued stocks during bull markets can provide you with significant long-term returns, provided that the company has the potential to deliver those returns. Today, I will discuss two TSX stocks that are trading for a significant discount from their valuations at the start of the year, but only one of the two companies is a stock you should consider adding to your portfolio.

A stock to buy

Algonquin Power & Utilities(TSX:AQN)(NYSE:AQN) is a solid business and a low-risk stock for you to consider investing in at a bargain in this expensive market environment. The company is a Canadian Dividend Aristocrat with a long dividend growth streak that can provide you with a stable passive income through shareholder dividends for years.

The company’s acquisition of Kentucky Power and Kentucky Transmission, along with its share offering to fund the deal, resulted in a pullback in its share prices. The stock is trading for $17.77 per share at writing, boasting an inflated and juicy 4.84% dividend yield. The stock is down by almost 15% year to date.

Algonquin stock could be an excellent asset for you to consider adding to your portfolio between its discounted share price, potential to deliver stellar returns through capital appreciation, and solid dividend growth for years to come.

A stock to avoid like a plague

Canopy Growth (TSX:WEED)(NYSE:CGC) is a clear leader in Canada’s legal cannabis industry. The stock is trading for $16.99 per share at writing, down by over 50% year to date and by almost 75% from its all-time highs in 2018. Considering that the company boasts the largest market share in the tracked Canadian recreational cannabis market, it might make sense to consider investing in the industry-leading company.

However, Canopy Growth has been among the worst performers among weed stocks on the TSX. The company’s Q1 earnings report for fiscal 2022 (or the quarter that ended on June 30, 2021) showed that its revenues increased by 31% from the same quarter for fiscal 2021. However, the company’s net operating loss increased by 9% for the same period.

Smaller cannabis companies have been performing far better than Canopy Growth stock, but the industry is in an overall weak position. It is unlikely for weed stocks to deliver on the promise that many investors once saw in them when Canada legalized recreational cannabis use over three years ago.

Foolish takeaway

If you are looking for a high-quality Canadian stock to buy in this expensive market for a bargain, it is important to understand the underlying business and its potential to provide you with investment returns in the long run. Not all companies trading for attractive share prices are worth buying.

Algonquin stock is trading for an attractive valuation, but it has strong fundamental factors supporting its potential to provide you with stellar shareholder returns. Canopy Growth stock looks cheap compared to its all-time high share prices from a few years ago. However, the company has a long way to go in showing a clear path to profitability before you can consider making a risky bet on the stock.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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