You must have heard how the TSX Composite Index lost 900 points as the U.S. banking crisis triggered a panic. When the market loses value, fundamentally strong stocks become undervalued, creating a perfect opportunity for value seekers. It is time to prepare your monthly Tax-Free Savings Account (TFSA) investment strategy for April.
The current market scenario
The current market is balancing on a thin rope. On one side, investors fear a recession and are waiting on the sidelines for a dip. On the other side, the central banks are holding the rope (not too tight, not too loose), balancing the economy. Canadian banks expect to see a mild recession and have prepared themselves by increasing the risk ratios.
Three value stocks to buy in April
The market dip has created an opportunity to buy value stocks with secular growth trends at attractive discounts. It is time to invest your Tax-Free Savings Account (TFSA) amount in these three value stocks.
REITs – a contrarian opportunity
According to the Royal Bank of Canada’s economic outlook, a recession is inevitable as high-interest rates trickle down to business and consumer debt repayments. The rate hike will increase mortgage payments when fixed-rate mortgages renew. That is when households will feel the pinch as mortgages eat up a significant portion of the monthly budget. With mortgages rising, housing prices could fall further after slipping more than 15% since March 2022.
While several REITs could cut distributions, CT REIT (TSX: CRT.UN) might increase distributions because over 90% of its rental income comes from its parent Canadian Tire (TSX: CTC.A). The REIT has an advantage over others as its privileged relationship with Canadian Tire gives it the sector’s longest weighted average lease term of 8.6 years. Moreover, the REIT has no significant debt maturing in 2024 and no public unsecured debentures maturing until 2025, reducing the refinancing risk.
CT REIT also enjoys a 99.3% occupancy ratio. It is expected to add nearly 1.3 million square feet of gross leasable area to its portfolio by the end of the year and has already pre-leased 99.5% of the space. Higher occupancy means higher cash flows, which translates into higher distributions.
CT REIT increased its distributions by 4.1% year over year in 2022 while maintaining a payout ratio of 74.5%. While falling property prices and a recession could pull down CT REIT’s stock price, its resilient fundamentals bring a contrarian opportunity to lock in a higher distribution yield.
BCE – a stock for passive income
BCE (TSX: BCE) stock is resilient to a recession. Despite reduced purchasing power, people will continue to subscribe to data plans. Unlike CT REIT, BCE’s earnings will be impacted by higher interest expenses as loans renew. The company expects its 2023 earnings per share (EPS) to fall 3-7%. But a slowdown in capital spending will increase its free cash flow by 2-10% and support the telco’s 15-year history of 5%-plus dividend growth.
Investors have already priced in the 12-month-long interest rate hike, with the share price down 17% from its April 2022 high. The stock price dip has created an opportunity to lock in a 6.39% dividend yield.
Nuvei – a growth stock when the market recovers
While other stocks fell after the U.S. banking crisis, Nuvei (TSX: NVEI) stock jumped 25% as the payments platform reported a strong outlook for 2023. The payments solutions processor is benefitting from global expansion. It scaled its Asia-Pacific operations and accelerated growth in Latin America. However, volatility in digital assets and cryptocurrencies slowed its fourth-quarter growth.
But Nuvei expects 2023 to be a strong year as it will include the synergies from the Paya acquisition. The acquisition is expected to grow Nuvei’s 2023 volumes and revenue by 54% and 48%, respectively. However, the company expects revenue growth rate to moderate to 20% in the long term.
Nuvei stock has already lost 75% of its value from the peak of the 2021 tech bubble, correcting the value and bringing it on par with its fundamentals. The stock could grow when the economy recovers and e-commerce transactions surge.
Diversify across market sectors and asset classes to get the best of a recovery rally.
