Stocks underperform amid periods of higher inflation. So, is it an inappropriate time to enter markets as inflation is at a three-decade high?
Yes and no!
Some sectors do face difficulties amid rising raw material prices and suffer from lower earnings growth. However, at the same time, some names still play well in inflationary environments. Here are three top TSX stocks that could generate solid returns in the long term.
Tourmaline Oil
Natural gas prices have doubled this year and are expected to rise further. Canada’s biggest natural gas producer, Tourmaline Oil (TSX: TOU), will likely be the prominent beneficiary. The financial growth it has seen in the last few quarters has been mind-blowing. Notably, the trend will likely continue with a strong price environment and the company’s strong position.
Tourmaline has showered its shareholders with generous dividends recently, driven by its free cash flow growth. The stock has gained a striking 80% this year. So, it has been a double delight for TOU shareholders.
And if you think energy stocks are already at record highs and are waiting for some correction, that may not happen soon. A strong macro environment and undervalued stocks will likely keep them at elevated levels.
According to CNBC, natural gas prices will rise by at least another 25% due to increased demand during the summer. That means there is still a significant potential for earnings growth for Canadian gas producers like TOU. In addition, higher free cash flow will likely facilitate balance sheet strengthening and more dividends, which should further bolster investor sentiment.
Fortis
After a growth pick, I will pitch a stable, income-generating utility stock — Fortis (TSX: FTS)(NYSE: FTS). If your investment horizon is fairly long, like more than three or five years, stocks like FTS should do well.
Fortis has large, regulated operations that earn stable returns in almost all kinds of economic cycles. And it gives away more than two-thirds of its earnings to shareholders in the form of dividends. As a result, it offers a low-risk, moderate return proposition, which plays particularly well in bearish markets.
FTS stock currently yields 3.3%, similar to broader markets. What’s notable is its long dividend-growth streak. It has increased its payouts for the last 48 consecutive years. That shows its earnings visibility and balance sheet strength.
In the last 10 years, Fortis stock has returned 10.6% on average per year, while TSX Composite Index has returned 5%.
Shopify
After a brutal 80% drop in the last six months, I think Shopify (TSX: SHOP)(NYSE:SHOP) is back at attractive levels again. Not that the stock would see a one-way reversal, but the downside from here looks limited.
The management had already guided weaker earnings growth for the first half of 2022 due to the absence of COVID-related growth factors. However, the e-commerce enabler will likely see industry-leading growth later this year mainly due to its growing market share in retail e-commerce.
Also, its merchant base and expanded product base should drive top-line growth in the post-pandemic world. All in all, the company should benefit from the accelerated swing towards digital commerce.
The broad market sentiment still does not seem too kind for growth stocks like SHOP. Rapidly rising rates could weigh on them, bringing them further down. So, keeping a cash balance to buy another tranche at lower levels will be prudent.
