After a bearish momentum triggered by inflation and rising interest rate, the TSX Composite Index is showing signs of recovery. Everything, from oil to real estate investment trusts to tech stocks, is rising over hopes of easing inflation and interest rates. Before the new bull market begins, it is time to load your Tax-Free Savings Account (TFSA) with some growth stocks that could rebound in an economic recovery.
Three stocks to buy ahead of a bull market
When the economy recovers, people have more disposable income in their hands. The demand for discretionary products boosts, as does the need for financing and payments. But consumer spending will take time to materialize, as a slowdown in interest rate hikes will help consumers plan finances. But to tap this recovery, you have to buy the stocks today. Here are three stocks that show growth is in the cards.
Just listing the stocks is not enough. You should know why to invest in these stocks and how much growth to expect.
In more than three decades of non-prime lending, goeasy has improved its credit risk model and the credit score of several of its customers. The company increased its 2022 revenue by 23.3%, despite weak macro conditions and a tight lending market. This revenue came from loan processing fees and interest income. However, its operating margin fell to 36.2% (38.3% in 2021), as its gross yield from loans fell due to an improvement in credit score.
The reduction in operating margin is a trade-off for lower credit risk. In an uncertain economy, this is a good sign as the risk of default is high. goeasy expects to grow its loan book from $2.79 billion in 2022 to $3.5 billion in 2023 while maintaining a 36% operating margin and 8-10% net charge-off rate (which highlights the risk of default).
While goeasy improved its fundamentals through 2022, its stock is trading at March 2021 level, 42% below its 2021 bubble peak. The stock already surged 17% this year and could grow 50-60%, as more people seek auto and home renovation financing.
Another growth sector is automotive, which revived in 2021 with the electric vehicle (EV) boom and pent-up demand during the pandemic. Auto components maker Magna’s revenue surged 11% in 2021. But the growth hit a wall in 2022 due to supply chain issues, and Magna stock fell 25% in 2022. However, the company expects a recovery in the second half of this year if there are no surprises on the macro front.
A recovery could revive EV demand and reduce Magna’s growing inventory. It expects revenue to surge at a compounded annual growth rate of 6.8% over the next three years. The company also looks to improve its operating margin to 7.2% by 2025 from 4.4% in 2022. This revenue jump could grow the stock gradually when the economy recovers and increase its price to $100 — a 29% upside from the current trading price.
The payments platform Nuvei is the initial public offering (IPO) that gained fame in the tech stock bubble. However, the stock slumped 73%, as the bubble burst, pulling the stock below its IPO price. The company earns a commission on transactions that happen through its platform. It allows businesses to transact in more than 200 markets, 150 currencies, and +580 alternative payment methods to boost transaction volumes.
Now people and businesses transact more in a growing economy. The stock can ride the e-commerce and crypto wave when the economy revives. The company aims to achieve a long-term target of 30% revenue growth and more than 50% operating margin. While I do not expect the stock to reach its bubble peak of over $170, it could double to $90 in the next two years.
The above three stocks can diversify your risk across three sectors, with each having different growth catalysts. They could generate double-digit growth in the coming two years.