With the banking sector crisis easing after UBS’s takeover of Credit Suisse, the S&P/TSX Composite Index rose 1.4% over the last two days. However, sticky inflation is a cause for concern. In a resilient economy, investors fear the Federal Reserve could continue its monetary tightening initiatives to stem stubborn inflation. The rising interest rates could increase borrowing costs, thus hurting economic growth.
So, given the uncertain outlook, I believe these two TSX stocks would be an excellent addition to your portfolio.
Dollarama
Dollarama (TSX:DOL) would be my first pick, given its stability and high-growth prospects. Since 2011, the company has grown its revenue and EBITDA (earnings before interest, tax, depreciation, and amortization) at a CAGR (compounded annual growth rate) of 10.7% and 16.4%, respectively. Supported by these solid financials, DOL stock has delivered impressive returns of 714% over the last 10 years at an annualized growth rate of 23.3%.
Meanwhile, given its expanded product offerings, solid value proposition, and extensive store base, I expect the uptrend to continue despite the challenging macro environment. Thanks to its direct sourcing capabilities and efficient logistics, the company has delivered compelling value to its customer. So, as inflation creates a deeper hole in consumers’ pockets, I expect the discount retailer to witness an increase in footfall.
The retail store chain is expanding its footprint and expects to grow its store count to 2,000 by 2031 compared to 1,462 by October 30. It is also expanding its footprint in South America through Dollarcity stores. Over the next six years, the company expects to raise the Dollarcity store count to 850 from its current 395.
Further, Dollarama enjoys higher margins than its peers, owing to its capital-efficient and direct-sourcing business model. The company has achieved average annual revenue of $2.6 million within two years of opening a new store, reflecting its efficient capital utilization and high returns on investment. Besides, the company has rewarded its shareholders by repurchasing shares worth $5.5 billion since 2013 while paying $533 million in dividends.
BCE
Telecommunication service has become an essential service in this digitally connected world. Amid digitization and increased adoption of the hybrid working model and remote learning, the demand for the internet is rising, expanding the addressable market for telecommunication companies. So, given the favourable environment, I am betting on BCE (TSX:BCE), which is aggressively expanding its 5G and broadband network. By the end of last year, the telecom’s 5G infrastructure covered 82% of the Canadian population and had completed 80% of its broadband buildout program.
These investments could expand BCE’s customer base in the coming years. Meanwhile, management expects to add 650,000 new broadband connections in 2023. Along with the expanding customer base, its bundled product offerings and rising revenue from its media segment could boost its financials in the coming years. Further, BCE has raised dividends by over 5% annually for the last 15 years, supported by its stable cash flows from recurring revenue sources. Its dividend yield for the next 12 months stands at a healthy 6.37%.
Investors’ takeaway
As the Federal Reserve focuses on fighting inflation, the equity markets could be under pressure in the near term. However, given their solid business models, stable cash flows, and healthy growth prospects, I expect these two TSX stocks to outperform the broader equity markets in this volatile environment.
