Interest Rate Hikes on the Horizon? Where to Invest $5,000 to Avoid the Volatility

Here are two TSX stocks that could play well even if the rate hike cycle persists.

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Canadian energy stocks are rising with oil prices

Markets started 2023 on a positive note and have gained almost 5% so far this year. However, it seems that investors began celebrating too early, and we still have significant ground to cover on the inflation front. The latest labour market report and consumer prices indicate that the US economy is still hot, and interest rate hikes might continue. The US 10-year Treasury yields surged beyond 3.9% this week, implying a sharper increase in the Fed’s upcoming meeting.

Rapidly rising interest rates have already done enough damage to growth stocks. The rate hike cycle continuing for longer-than-expected could further dent investor sentiment, fueling more selling. But not all stocks are equally exposed to these pressures. Some might remain resilient and outperform as they did last year.

Here are two such TSX stocks that could play well even if the rate hike cycle persists.

#1 TSX stock for your all-weather portfolio

Canadian value retailer Dollarama (TSX:DOL) will likely keep beating broader markets in 2023 and beyond. It returned 25% last year, while the TSX Composite Index lost 5%. When growth stocks were making new lows last year, DOL stock was comfortably breaching its record highs.

Dollarama’s outperformance is justified by its visible, industry-leading earnings growth and competitive advantage. Its low-cost, wide array of merchandise became more valuable for consumers amid the rising price environment. As a result, its topline expanded by 11% last year, higher than its five-year average. While broader markets saw margin erosion last year, DOL continued to witness margin stability, highlighting its business strength.

DOL stock has dropped 10% since its 52-week high of ~$86 in December last year. It is currently trading at a price-to-earnings ratio of 30x and does look stretched. However, DOL stock might continue to trade strong, driven by its handsome financial growth prospects in the inflationary environment.

#2 TSX oil and gas stock

Canada’s largest oil producer Canadian Natural Resources (TSX:CNQ) is another stock that looks attractive even if inflation and rate hikes continue.

Energy companies have the pricing power to maintain profit margins by passing on the higher cost burden to their customers. That’s why oil and gas producers did not see much impact on higher inflation last year. This year, as well, they will play relatively better compared to broader markets.

Even if oil prices have tumbled of late, energy companies like Canadian Natural Resources will likely outperform. And that’s because of their fundamental strength. Supported by solid free cash flow growth and debt repayments, CNQ is in much stronger shape since the pandemic. Moreover, its dividends and share buybacks will likely continue contributing to decent shareholder returns. Also, oil and gas companies’ focus on shareholder returns indicates management’s confidence in future earnings growth.

CNQ stock has returned 18% in the last 12 months, while TSX energy stocks at large have returned 25%. It is currently trading at a dividend yield of 4.3%. In 2023, CNQ increased its dividends for the 23rd consecutive year. The oil major’s scale, strong balance sheet, and visible financial growth could drive its stock higher this year as well.

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.

The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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