Chasing hot Canadian stocks with the expectation of more of the same can be quite a dangerous game. A lot of the momentum chasers of 2022 got stung, and they’re sitting on painful losses to this day. Still, that’s not to say all stocks at or around their all-time highs are to be avoided by the plague.
If you’re not feeling euphoric or are looking at a stock solely because of its past trajectory, there may be reasons that justify buying at new highs.
At the end of the day, you’ve always got to put in the due diligence. Whether we’re talking about a stock that’s at new highs or one that’s off more than 50-75% from its peak. Just because a stock is at a multi-year low does not necessarily suggest undervaluation.
Chasing hot Canadian stocks without running the risk of getting stung?
On the flip side, a stock at a new high doesn’t mean overvaluation. In certain circumstances, a stock at a new high may still be too cheap for its own good, with legs to sustain a rally to much higher levels. In this piece, we’ll have a look at two stocks that I think can march higher led by earnings, and not just hype-driven multiple expansion.
Whenever you’re looking at a white-hot stock that has hype (and a lack of earnings) behind it, you may be finding yourself jumping into a bubbly name. However, if a stock is still cheap based on traditional valuation metrics (think the price-to-earnings multiple, or P/E), then you may have one of those winners that will go on to keep winning!
Without further ado, consider Alimentation Couche-Tard (TSX:ATD) and Fairfax Financial Holdings (TSX:FFH).
Couche-Tard is a global convenience store company that’s been active on the merger and acquisition (M&A) front of late, scooping up the assets of TotalEnergies. The deal gives Couche more presence in Europe and has helped shares of ATD sustain a rally to new highs.
At writing, shares are at around $68 per share. Despite the impressive 13% year-to-date rally, I view the stock as undervalued. It’s going for 17.64 times trailing P/E. And unlike many growthy tech firms, it has earnings growth backing its rally. With enough dry powder to keep making deals, I view Couche-Tard as a major beneficiary of the “tighter” credit environment.
Couche-Tard is a wonderful business. It has room to run as the firm continues to take it slow and steady with its growth. Back in 2022, Couche-Tard didn’t follow the herd, by overinvesting or scratching its M&A itch. Instead, it stayed the course. And now it’s in a position to outpace the rest of the market.
Fairfax Financial Holdings
Fairfax is another top performer that likely has room to run over the next year. Since bottoming out at around $350 and change in 2020, Fairfax has been on a remarkable rally. Share blasted above $930 per share. That’s a huge gain for believers of Prem Watsa and his firm.
I don’t think the gains are over, even as shares creep below the $900 mark. The stock remains dirt-cheap at 14.83 times trailing P/E. Further, the underwriting track record and investments underneath the hood are likely to go on the right track from here. At these depths, Fairfax is more than just fairly priced, it’s absurdly cheap, with momentum behind it.