M&A Watch – 2 Top TSX Stocks Poised to Make Deals in 2023

Spin Master and another dirt-cheap TSX stock that could soar high for investors, even as recession sets in.

| More on:
little girl in pilot costume playing and dreaming of flying over the sky

Image source: Getty Images

Market volatility has carried into the New Year, with new investors continuing to fret over the Federal Reserve rate hikes. Unsurprisingly, with high levels of inflation, investors saw rates surge in 2022. The rate hikes weighed heavily on stock valuations, sparking one of the ugliest and lengthiest bear markets in recent memory. Unfortunately, the bear’s reign is not yet over, but don’t let continued selling activity stop you from putting money to work. With $6,500 in TFSA contribution space, investors should look to find value in a market that could turn on a dime at any moment.

It’s hard to believe that stocks can rally higher without a more dovish Federal Reserve. As they continue to be hawkish, investors will need to play it safe with profitable companies that sport fundamentals capable of standing up to a potentially steep economic drop.

As macro pressures continue to weigh on firms from across the board, I’d look for M&A activity to pick up. Joining forces to overcome a tough environment tends to be the best course for smaller firms that may not be best equipped to deal with many months of slowing growth.

As for the firms with the balance sheets healthy enough to make deals, there’s considerable value to be had, as valuations continue to fall back to Earth.

As we move into a world where rates could stay higher longer, I want companies that have strong cash positions and the urge to merge.

In this piece, we’ll look at two firms with strong M&A track records and equally strong balance sheets. I’d look for both firms to wheel and deal in 2023 and beyond.

Alimentation Couche-Tard

Alimentation Couche-Tard (TSX:ATD) is a convenience store giant that finished 2022 up around 20%. Indeed, the consumer staple has zigged higher while the rest of the markets zagged lower. As economic woes intensify over the coming weeks and months, I’d look for Couche-Tard to extend its lead over most other names in the market.

With a very strong balance sheet (around $15 billion (and counting) in acquisition capacity), look for Couche-Tard to go on the hunt for a bargain in the global convenience store (or grocery) space this year.

Indeed, Couche-Tard’s expansion knows no boundaries. The firm has grown a sizeable presence across North America and Europe. Next, the firm could break into the Australasian region with a historic deal. Management expressed interest in expanding into the region. As valuations sink across the retail industry, look for Couche-Tard to explore opportunities to pay two quarters for a dollar.

When it comes to value creation via M&A, synergies are the name of the game. And few firms can make the most of them better than Couche-Tard. For now, Couche is sitting on its hands (for the most part), but I’d not discount the potential for smaller deals, as more potential acquisition prices fall into Couche-Tard’s strike zone.

At 15.8 times trailing price-to-earnings, I believe ATD stock is heavily discounted, given its recession resilience and strong balance sheet going into a Fed-mandated recession.

Spin Master

Spin Master (TSX:TOY) is another Canadian icon that’s made some pretty sweet deals over the years. The company actually acquired Etch-a-Sketch and stuffed-animal maker Gund. These are two brands that will be around for many decades, if not centuries. More recently, Spin has acquired innovative toy firms, including puzzle-maker 4D brands. Evidently, Spin is open to scooping up legendary old-school brands in addition to intriguing new concepts that could have the potential to become the next generation of classic toys.

Right now, the toy industry is in a bit of a rut alongside almost everything else these days. As sales drag, Spin’s numbers will not be pretty. That said, expectations are muted, and Spin will have an opportunity to make the most of industry weakness by looking to buy a peer at a discount.

The recession will not spare Spin. However, odds are good that Spin will walk away from the year with a few deals in hand. For that reason, the absurdly low single-digit (8.7) price-to-earnings multiple does not do the stock justice. I think the toy juggernaut is misunderstood and would look to M&A as a major earnings driver over the long haul.

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 Joey Frenette has positions in Alimentation Couche-Tard. The Motley Fool has positions in and recommends Alimentation Couche-Tard and Spin Master. The Motley Fool has a disclosure policy.

More on Investing

A shopper makes purchases from an online store.
Tech Stocks

Better Buy: Shopify Stock or Amazon?

Let's see which e-commerce stock is a better buy between Shopify and Amazon in 2023 and beyond.

Read more »

Growth from coins
Stocks for Beginners

Got $5,000? These 2 Growth Stocks Are Smart Buys

Are you looking for some smart buys for your portfolio? Here are two great options to buy now while you…

Read more »

stock research, analyze data
Bank Stocks

Better Buy: TD Stock or Bank of Nova Scotia?

TD Bank and Bank of Nova Scotia still look cheap. Is one a good buy today?

Read more »

Dial moving from 4G to 5G
Dividend Stocks

Down by 15%: Is BCE Stock a Good Investment in January 2023?

Few companies are truly “too big to fail,” but most market leaders are far more resilient against market headwinds or…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

Looking for $200/Month in Alternative Income? Buy 530 Shares of This Stock

Do you want to earn $200 monthly alternative income for the next few years? Then accelerate your investments in this…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Deadline Coming: 3 TFSA Stocks to Buy Now Before Dividend Payouts

Invest in RNW stock and 2 other TFSA friendly names before this fast-approaching deadline to get the full 2023 dividend.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Passive Income: How to Earn Nearly $367 Per Month in Your TFSA Portfolio

Top TSX dividend stocks now trade at discounted prices for TFSA investors seeking passive income.

Read more »

Businessman looking at a red arrow crashing through the floor
Tech Stocks

3 Growth Stocks Down Over 50% That Are Screaming Buys in January 2023

Given their healthy growth prospects and discounted stock prices, these three growth stocks could deliver superior returns over the next…

Read more »