Canadian investors are grappling with one of the ugliest environments we’ve ever been in. Not only is the market in a correction, with various folks fighting off the U.S. Federal Reserve and Bank of Canada over rate hikes, but inflation continues to plague the wallets of consumers. Sure, fixed-income interest has gotten a lot better over the past year. But compared to inflation, which may not be quick to retreat this year, they still look to be a losing bet from a real returns perspective (that’s on an after-inflation basis).
Though it’s easier to stomach a small loss of purchasing power with GICs (Guaranteed Investment Certificates), bonds, or savings compared to fast-falling risky assets, I’d argue that from a risk/reward standpoint that stocks still seem to be the best game in town.
The game plan for many investors has been to load up on defensive dividend stocks, especially those in the utility space. Though the plan has worked for most of the first half, I’d argue that valuations are becoming a tad stretched at worst and fair at best.
Don’t overpay for defensive stocks: Seek value and be ready to embrace volatility
For those seeking considerable real returns, some of the more beaten-down areas of the market may finally be worth considering. Of course, you will need the pain tolerance to bet on such bargain plays as they continue to overshoot to the downside.
Remember, Mr. Market isn’t always accurate at pricing a stock at its intrinsic value, especially at a time like this when the uncertainties couldn’t be greater. Just as expensive stocks got more expensive in 2021, cheap stocks can also get a heck of a lot cheaper, as the market pendulum overswings in the negative direction.
For investors, this overswinging is an opportunity for those with the dry powder and courage to hit that buy button when nobody else will!
Consider firms like CAE (TSX: CAE)(NYSE:CAE) and MTY Food Group (TSX: MTY), two intriguing firms that are in a bear market with potential relief upside in the next 18 months.
CAE
CAE is a $10 billion simulation kingpin that derives a considerable chunk of revenue from civil aviation. Though there’s a strong defence business, it will be hard for the firm to recover to pre-pandemic levels until air travel can return to some state of semi-normalcy. In due time, I think it will, and many pilots will need to get up to speed. As they do, CAE’s training services will be in high demand. And I’d argue that CAE is a leading indicator of what to expect from airlines.
In the meantime, the defence business has been a pillar of stability. With the Ukraine-Russia war ongoing, anything defence-related has been bid up. With simulation assets from L3Harris in the books, I view CAE as a far better way to play air travel than the capital-intensive, undiversified airlines.
MTY Food Group
MTY Food Group is the king of the food court. During the pandemic, it took a major hit. And like CAE, shares recovered but have since sagged lower in recent months, as markets anticipate a potential rate-hike-driven recession.
Indeed, lockdowns weighed on the markets in 2020. In late 2022 and 2023, it could be a recession. From one bad thing to another, MTY can’t catch a break. Still, its brands are resilient, and its balance sheet is on some decent footing. With a lot of recession risk baked in, I’d argue MTY is a bargain at these levels. Sure, a consumer slowdown will impact shopping mall traffic. But at the end of the day, it looks like we’re facing a mild cooldown, not a crisis-level downturn.
The way I see it, the market is paying back the interest on what was owed during the 2020 market crash.
