Top Canadian auto parts maker Magna International (TSX:MG) stock is no stranger to extreme volatility. Cycles come and go. As do the booms and busts in the stocks of the firms with ties to the auto industry. Though discretionary companies may be less appealing at a time like this, with a potential economic downturn likely just months away. Still, I’d argue that the market may already be a tad ahead of you regarding cycle timing.
At the end of the day, the stock market is a forward-looking beast.
It’s a good gauge of what to expect from the economic environment up ahead. Indeed, it would have been far more helpful if economic projections were a better indicator of where the stock market would head next. Though you’ve probably heard various pundits noting that the stock market seldom bottoms out before the recession begins, I’d argue that anything is possible in today’s bizarre economic climate.
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Investing through a recession: Why bother?
We spent the vast majority of 2022 focused on a potential recession. With that, many recession downside may already be factored into valuations. It’s impossible to know just how much “recession pain” is already considered by Mr. Market.
The actual recession could be worse than expected, or it could be less painful. Either way, I think it’s unwise to think markets can only react negatively, even once the recession “storm” finally does hit us.
For investors who’ve already braced themselves for impact, such a recession storm may not cause as much damage to our portfolios. We’ve all had plenty of time to gear up for a potential downturn with value stocks or recession-resilient investments.
With so many focused on taking risk off the table ahead of a recession, I do think discretionary stocks are being neglected. A short-lived recession may be ideal for cyclical firms like Magna.
Magna stock’s rough ride may not be over, but the risk/reward seems impressive
Magna stock has already shed more than 42% of its value from 2021 peak levels of around $125 and change per share. Of course, more downside could be on the horizon if we’re in for a doozy. However, if the recession comes and goes quickly, Magna investors may already be focused on the long-term thesis again.
I view a recession as merely a temporary interruption to a secular trend. For Magna, the rise of next-generation electric vehicles is still a secular tailwind that could extend many years. Of course, secular tailwinds can feel stronger when times are good. But it’s important to remember that an economic hurdle likely is not enough to derail a firm’s longer-term road map.
Only time will tell when Magna can rev its engine again. With a good amount of support in the low-$70 range, I’d argue Magna stock is in a bit of a sweet spot from a technical perspective. On the fundamental side, the stock also looks pretty cheap, provided you’re willing to deal with Magna’s navigation through a rough patch in the road.
Get paid to wait with Magna stock
Magna’s 3.6% dividend yield seems more than enough incentive to buckle up for the ride. At 1.4 times price to book, Magna is incredibly cheap given its longer-term prospects, which will likely reward investors willing to hold for at least five to 10 years.
