Suppose you are new to investing, it’s prudent to begin with proven names. Stable companies with long-track records and strong reputations are generally apt for beginner investors. On the other hand, small-cap companies with relatively unstable profitability could bring high risk to your capital.
Here are three top TSX stocks you can consider.
Bank of Montreal
Banks are the first ones to lose steam when the economy starts derailing. And that’s why TSX bank names have been trading subdued since last year. There is a high possibility of a recession due to adamant inflation and rapid rate hikes this year. Canada’s third-largest bank, Bank of Montreal (TSX: BMO), has lost 11% in the same period. But this could be an opportunity for long-term investors to buy this high-quality name.
Bank of Montreal pays handsome dividends that yield 4.5%. Moreover, it has some of the longest dividend payout streaks of 194 consecutive years. Its earnings stability and sound balance sheet will likely keep funding its dividend in the future.
For the fiscal first quarter of 2023, Bank of Montreal reported an adjusted net income of $2.27 billion, implying a fall of 12% year over year.
Notably, many Canadian banks have upped their provisions in the recently reported quarter due to an expected increase in loan losses. However, BMO has kept its provisions at $217 million, highlighting a much stronger balance sheet. Its common equity tier-one ratio beyond 18% is the highest in the industry and indicates superior asset quality.
BMO stock might continue to trade weak for the next few quarters amid the macroeconomic challenges. However, it will likely outperform in the longer term, driven by its sound balance sheet, steady earnings growth, and stable dividend.
goeasy
Canada’s top consumer lender goeasy (TSX: GSY) is one of the top wealth creators. It has returned a mammoth 15,500% since 2001. It is the strong execution that resulted in solid earnings growth, bringing in such a massive shareholder value consistently.
Despite being in a risky consumer lending industry, goeasy displayed above-average earnings growth. Its strong underwriting and omnichannel presence drove industry-leading growth all these years. goeasy primarily lends to non-prime borrowers, which traditional financial institutions do not serve.
The lender’s net income has grown by 30% compounded annually in the last decade. Its long-term average return on equity comes to around 20%, implying strong profitability.
GSY stock has gained 15% so far this year. The stock was weak last year due to rising interest rates and higher inflation. However, as the economy again gains stability later this year, GSY stock will likely turn higher.
Constellation Software
Canadian software giant Constellation Software (TSX: CSU) has outperformed its peers in the long term. Notably, it has played well since last year, even when TSX tech stocks trended lower on rate-hike woes. CSU stock has returned 13% in the last 12 months, while TSX tech names gained a mere 3%. In the last decade, CSU stock has returned 2,000%.
The outperformance was driven by its unique business model and consistent profitability. The company acquires smaller vertical market software companies and expands scale. The free cash flow generated by these companies is reinvested back to buy more such firms that offer superior growth prospects.
Tech stocks with stretched valuations saw massive value erosion last year. However, CSU stock kept trading at rich valuations almost throughout last year’s bear market. This justifies its premium valuation and implies investors’ continued expectations of high growth.
