The Bank of Canada made an aggressive interest rate hike of 100 basis points to curb inflation. This move pulled the TSX Composite Index down 2% on June 14. The interest rate and the stock market have a negative correlation as a spike in interest rate makes lower-risk, fixed-income securities more attractive than higher-risk equity. The rate hike will continue throughout the year till inflation comes down to the target rate of 2%. You can make the most of this situation by grabbing value stocks in your Tax-Free Savings Account (TFSA).
It’s time to buy value stocks
The famous value investor Warren Buffett made billions by picking up value stocks in a market downturn. The S&P 500 Index has had an average annual return of around 10.5% since its inception in 1957. But those who invested in the market corrections (10-20% dip) and downturns (over 40% dip) outperformed the market significantly.
Value investors seek companies that have
- The financial flexibility to withstand a recession and remain operational;
- Demand for their product or service; and
- Readiness to restart business efficiently when demand returns.
I have identified two value stocks that have all three things, plus attractive price ratios and dividends. You won’t regret buying this recession.
- Magna International (TSX: MG)(NYSE: MGA)
- True North Commercial REIT (TSX: TNT.UN)
Magna stock
A multi-bagger stock is where no one is investing in the present, but it has a bright future. Magna International is one such stock. Its $2 billion cash reserve and healthy working capital ratio give it the financial flexibility to withstand a recession and remain operational. It has a long-term debt of $3.5 billion, but its $1.5 billion investment portfolio and positive cash flows can take care of any near-term maturities.
Magna offers automotive components like seating, body exteriors, power and vision, and complete vehicle assembly. The company has partnered with 24 of the top 25 electric vehicles (EV) makers and has orders from several tech and automotive clients. Its products have significant demand in the EV revolution, but supply constraints have stalled this revolution. The looming recession could delay EV demand further.
Magna is using this time to invest in technology and secure more partners worldwide to be ready when demand recovers. It has all the ingredients of a growing business. But the stock has fallen prey to the short-term headwinds, pushing it closer to the oversold category.
Magna stock fell over 2% today and almost 44% from its all-time high. Despite this dip, it has a price-to-earnings (P/E) ratio of 13.3, which might look high at the moment as its EPS has dipped 40%. But the recovery could drive Magna’s EPS to the double digits, making it a value stock that can double your money during recovery. Moreover, you can lock in a 3.3% dividend yield.
True North Commercial REIT
This pure-play commercial REIT is a lender to government offices and high credit-ranking companies like Honeywell Aerospace and General Motors. The REIT has a weighted average lease term of 4.3 years and a 96% occupancy rate. Despite such a strong tenant base and occupancy rate, the REIT’s stock price has dipped 15% this year over fears of a recession.
But the REIT has a strong balance sheet and cash flow stream. Even if the recession vacates more offices, its 76% rental income from government and high credit-ranking tenants is secure. The demand for land will always be there, and this demand will increase in a growing economy. In the meantime, True North continues to develop its ongoing projects.
You can lock in a 9.4% distribution yield now and enjoy a 15-20% capital appreciation when True North stock price bounces back during the economic recovery.
How to invest in these value stocks
The right way to invest in these value stocks is to buy a little every month throughout the downturn and reduce your cost. Hence, when they recover, you could get higher returns.
