When investing for a longer term, fundamentals matter more than anything else. Returns are mainly driven by the earnings quality, balance sheet strength, and stock’s valuation. While news or events drive stocks in the short term, fundamentals prevail in the long term. So, here are two such TSX stocks with solid fundamentals.
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Canadian Natural Resources
Canada’s biggest crude oil producer Canadian Natural Resources (TSX: CNQ) is one compelling name in the TSX energy space. Its long-life, low-decline prolific reserves facilitate stellar cash flow growth in the current historically high-price environment. Its diversified product mix of heavy and light oil, along with natural gas, plays well for its top-line growth.
CNQ has repaid billions of dollars in debt since the pandemic. Its leverage ratio has improved from close to 4x in 2020 to 0.5x at the end of Q4 2022. Manageable debt and a solid liquidity position speak for its balance sheet strength. The company will likely see higher profitability this year due to lower interest expenses.
Many companies suspended dividends during the pandemic crash as cash retention became vital. However, CNQ was among the very few that kept its dividends growing. CNQ has increased shareholder payouts for the last 23 consecutive years thanks to its superior balance sheet and earnings growth visibility. The stock currently yields 4.6%, higher than the broader market average.
CNQ stock has returned 5% in the last 12 months and 350% in the last three years. It is currently trading seven times its 2023 free cash flows and 10 times its earnings. That’s a tad rich valuation compared to peers.
However, given its superior balance sheet, earnings growth prospects, and dominating market position, CNQ warrants a premium valuation. Despite its stretched multiple, it will likely continue to trade strong and outperform peers. So, a top energy company with a low-debt burden with a hoard of cash for shareholder returns is a worthy investment opportunity.
North West Company
Selling groceries in remote villages of Northern Canada and Alaska seems like a boring business. And that’s what the North West Company (TSX: NWC) has been doing for decades. However, this boring business has created decent shareholder wealth for years.
NWC stock has returned 15% since last year, notably standing tall in bear markets. In the last five years, it has returned 12% compounded annually, including dividends. It currently offers a dividend yield of 4%.
North West Company has seen its earnings grow by 14% compounded annually in the same period. Margin stability and stable free cash flow growth drove shareholder value all these years. The company currently has $400 million in debt, about 37% of its total capital. Its leverage ratio comes to around 1.3x, much lower than the industry average.
NWC stock is currently trading 15x earnings and looks discounted. Retailers in Canada trade at a higher multiple, indicating NWC’s relatively discounted valuation. However, a defensive nature and mediocre growth prospects justify the stock’s subdued valuation.
