Although markets have started the year on a positive note, stocks do not seem ready for a firm revival yet. Record high inflation and upcoming interest rate hikes might continue to weigh on them — at least for the next few quarters. However, few TSX stocks look attractive, despite these macroeconomic woes. Their visible earnings-growth prospects and valuation could fuel them higher, irrespective of the broad market uncertainties.
#1: Canada’s largest discount retailer
Canada’s discount retailer Dollarama (TSX:DOL) is an all-weather stock. It has outperformed in bull as well as in bear markets in the last decade.
Dollarama operates the largest chain of value stores spread across Canada. Its wide array of merchandise, unique value proposition, and efficient supply chain have played out well over the years. While markets at large saw a decline in revenues and pressure on margins since last year, Dollarama has seen faster revenue growth and stable margins.
DOL stock has returned 25% in the last two months and 700% in the last decade. Its share-buyback program and stable financial growth will likely drive the stock higher this year.
DOL stock is trading 30 times earnings and looks stretched from a valuation standpoint. However, considering its earnings growth visibility amid this challenging macroeconomic environment, DOL stock looks appealing.
It has been trading lower this year, as market participants took a “risk-on” approach to hints of inflation easing. However, the still-hot economy and adamant inflation might force policymakers to resume the rate-hike spree. Defensives like Dollarama could again be in the limelight this year amid increased market uncertainties.
#2: Natural gas weakness is an opportunity
Canada’s largest natural gas producer Tourmaline Oil (TSX:TOU) is one of my favourite stocks among TSX energy. While gas prices have fallen more than 70% since mid-2022, TOU stock has dropped 30%.
Tourmaline Oil differentiates itself from its peers on several fronts. It has rapidly repaid debt since the pandemic and has achieved some of the lowest leverage levels. At the end of 2020, Tourmaline Oil had a debt of $1.9 billion, which has now dropped to $400 million, marking a substantial improvement in its balance sheet.
Moreover, it chose to pay special dividends to distribute its excess cash last year, while peers preferred stock buybacks.
For 2023, Tourmaline Oil has lowered its free cash flow guidance due to lower gas prices. However, it still offers attractive growth prospects. Its solid balance sheet and strong execution place it well in low-price environments as well. For example, its large condensate production and exposure to Californian markets obtain higher realized prices and compensate to some extent.
TOU’s recent weakness could be an opportunity for long-term investors. If natural gas prices turn higher later in the year, gas-weighted energy stocks like TOU could skyrocket.