As broader markets get choppier from here, Tax-Free Savings Account (TFSA) investors may wish to gravitate back to quality firms at discounted valuations. Indeed, there isn’t as much value today, as there was back in December. Still, TFSA investors shouldn’t look for any sort of green light or another pullback before getting into the market waters.
Looking ahead, stock pickers may wish to get pickier. With a recession looming and rates that could remain stubbornly high for another year (or more), investors should pay a price that implies a fairly wide margin of safety. In this piece, we’ll consider two solid blue chips that still look cheap, even if earnings are due for a bit of a slip in the back half of this year.
Fortis
First up, we have steady utility firm Fortis (TSX:FTS) whose shares tend to go their own way on any given day. The stock trades at 20.8 times trailing price to earnings (P/E) at the time of writing, which seems to be on the high side for a firm that isn’t exactly a quick grower. That said, predictability is what you’ll get from Fortis. The resilient operating cash flow stream is one of the main draws to the defensive dividend stock.
Even with the potential economic setbacks, Fortis can grow its dividend at a solid single-digit pace (I’d look for an average of 6% in annual dividend hikes). Sure, Fortis isn’t a name that will make you rich. But it is one that can compensate you fairly for your investment. The stock sports a 3.67% dividend yield at writing. That’s well below the more than 4% yield it sports earlier this year. Still, given the hand that Mr. Market could deal in this potential recession year, I’d say Fortis sports a decent risk/reward scenario.
The company clocked in a solid first-quarter earnings result that topped estimates. I think the post-earnings enthusiasm is warranted. Fortis stock may very well be on its way to all-time highs, especially if risk appetite fades once again.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) looks unstoppable these days. The stock’s impressive rally off early 2021 lows could easily continue for another several quarters, as the company continues growing its earnings. Couche-Tard isn’t just a predictable earnings growth story, it’s a balance sheet story. The company has made a handful of deals of late. But there’s still room for an elephant-sized acquisition that could move the needle.
Even if Couche-Tard doesn’t end up making a massive multi-billion-dollar deal, the firm can still put its cash and credit position to good use via organic initiatives or bite-sized deals. Two weeks ago, the company scooped up 112 gas stations from MAPCO Express. This deal comes just over a month after its US$3.3 billion TotalEnergies gas station deal.
Moving ahead, I think the firm is smart to make a large number of small deals. The market seems to be rewarding the stock for bite-sized deals, given management’s time-tested ability to drive synergies from deal making.
The stock is up over 72% from its early-2021 lows. Despite the hot run in the past two years, shares go for 17.5 times trailing price-to-earnings. As prices moved higher, earnings have done a great job of keeping up. At the end of the day, it’s this type of appreciation that I believe TFSA investors should seek. Not rapid multiple expansion at the hands of some hot tech trend.
