You don’t have to wait for markets to make new lows to invest. Market participants sometimes overreact and send the stocks below their fair valuations. Here are two such TSX stocks that are currently out of favour but offer handsome growth potential.
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Toronto-Dominion Bank
Toronto-Dominion Bank (TSX:TD) stock is currently trading 12% lower from its February highs of $92. Its pending deal with the First Horizon Bank has been cancelled and has cheered shareholders. While the union could have made TD the sixth-largest bank by assets in the U.S., the same could have made it more vulnerable given the banking crisis. However, TD’s growing U.S. presence has been a major growth driver in the last few years.
Canada’s Big Six banks look well placed to tackle the still higher inflation and rate hikes. And that’s because of their superior credit quality and liquidity positions. In case of TD, its common equity tier-one ratio came in at 15.5% at the end of the fiscal first quarter (Q1) 2023. That’s higher than the industry average and regulatory mandates. It is the ratio that measures a bank’s capital against its risk-weighted assets.
TD has managed to grow its earnings by 8% compounded annually in the last decade. Its return on equity averaged around 15% in the last few years, indicating superior profitability and efficient use of its equity capital.
Toronto-Dominion Bank also offers a handsome dividend, yielding 4%. The stock is currently trading at a price-to-book value ratio of 1.4, marginally higher than the industry average. With a potential recession in sight, TD stock might keep trading subdued in the short to medium term. However, as uncertainties regarding its First Horizon Bank are done, TD shares might see some boost. With stable earnings growth prospects and appealing valuation, TD could outperform its peers in the long term.
Aritzia
A luxury fashion stock Aritzia (TSX:ATZ) saw a massive selloff last week amid a poor outlook. In the latest reported quarter, the company saw its revenues surge 44%, while the net income grew 9% year over year. However, the management presented a gloomy outlook for the fiscal year 2024, with much slower revenue growth and a decline in margins.
Aritzia has been on solid growth in the last few years, fuelled by handsome growth in its e-commerce segment. Its free cash flows grew by a massive 60% compounded annually in the last five years. However, given the slowing economy and an expected drop in discretionary spending, the company management gave a downbeat outlook.
Aritzia expects its revenues to come around $2.46 billion in fiscal year 2024, representing 12% growth year over year. Just to put that into context, the company’s top line expanded by a stellar 85% annually in the last two years.
However, ATZ stock has lost almost 22% this year, and the weaker prospect seems baked into the stock. The selloff seems done at the moment. It is currently trading 25 times its 2024 earnings and looks fairly priced. Its expansion in the U.S. market, long-term growth in the e-commerce contribution, and ensuing margin expansion make it an attractive bet.
