The business cycle goes through phases — expansion, peak, contraction, trough, and recovery — before it starts over again and so on and so forth. Right now, we’re likely in the contraction phase, with some economists anticipating we will enter a recession later this year.
It can be tough to hold stocks when they decline substantially. However, that’s exactly when it may be a good time for investors to add to their positions if they have excess long-term capital to deploy. Here are three cheap stocks that I would buy before an economic expansion rolls around and the next inevitable bull market arrives again.
Brookfield Corp.
Brookfield Corp. (TSX:BN) is focused on growth. Consequently, investors should focus on price appreciation when investing in the growth stock. Brookfield is a skilled investor who owns and operates real assets. Overall, its assets generate substantial cash flows. Currently, it generates approximately US$5 billion of free cash flow from its long-term investments of roughly $125 billion across its core pillars — asset management, insurance solutions, and operating businesses.
If you observe the business earnings over the long run, you will notice that it’s cyclical. The growth stock is down more than 25% from its high in 2021. So, it could be an excellent buy on the pullback. Analysts believe the undervalued stock is discounted by 30-50%. If so, an investment in the growth stock today could double. Investors might need to be patient to wait for an economic expansion before the stock would experience a serious turnaround.
Magna International
As a large auto part maker, Magna International (TSX:MG) is also a cyclical stock. It’s super cheap today after it’s cut in half from its 2021 peak. It has the potential to double investors money over the next economic expansion phase that could come over the next three to five years.
Just like Brookfield, Magna also has a solid S&P credit rating of A-. However, Magna stock could have greater appeal to investors because of its higher dividend yield. Specifically, it offers a decent dividend yield of 3.5% versus Brookfield’s yield of 0.8%.
Magna stock has also sustained dividend growth through the last 13 years with a respectable 10-year dividend-growth rate of 12.6%. Although investors experienced greater volatility in the stock, they managed to get greater long-term returns as well. Its 10-year total returns were a compound annual growth rate (CAGR) of 14.2%, which beat the market.
Bank of Montreal
Compared to Brookfield and Magna International, Bank of Montreal (TSX:BMO) is a lower-risk stock because you can get periodic returns from higher dividend income. The big bank has a diversified business. Its core businesses include personal and commercial banking operations in Canada and the United States. It also runs businesses in wealth management and capital markets.
The big Canadian bank stock has a long track record of dividend payments and offers a safe dividend yield of 4.6%. For reference, BMO stock’s 10-year dividend-growth rate was 6.8%. At $123.46 per share at writing, analysts believe it trades at a discount of about 13%.
Investor takeaway
It’s a good idea to maintain sufficient portfolio diversification. These three cheap stocks are a good starting point in building a diversified portfolio aiming for strong upside potential in a bull market.
