There’s a big difference between chasing a hot, high-momentum stock due to hype and pursuing a top performer that may still have “rally fuel” left in the tank. Stocks at or around their all-time highs may be an indicator of full valuations, or perhaps overvaluation, but not all of the time! There also exist top performers that may still be cheap.
If a company’s earnings keep growing at a stellar pace, the price will need to rise accordingly to maintain a given price-to-earnings (P/E) multiple. Undoubtedly, earnings growth is harder to come by in times of recession. That said, there are a few companies that seem able to push higher, assuming the coming recession proves mild in nature.
Many pundits would agree that the next recession won’t be a doozy like the one endured in 2008. In this piece, we’ll look at two companies that have been major winners over the past year and could continue to score sizeable gains for shareholders who continue to stick by them, even as the economic climate becomes a bit more chilly.
Consider shares of Prem Watsa-run insurer and investment holding firm Fairfax Financial Holdings (TSX:FFH) and convenience store icon Alimentation Couche-Tard (TSX:ATD). Shares of both companies have enriched investors but are showing few signs that a hangover is on the horizon. I view both stocks are still reasonably priced, with catalysts that could help lengthen past-year gains to even higher highs. With that in mind, I see no reason to take profits on either name that continues to impress.
Fairfax Financial Holdings
Fairfax Financial is just shy of $1,000 per share after its colossal past-year surge of around 44%. The stock is up around 182% from its 2021 lows and could be headed higher, as the well-run firm improves its insurance underwriting performance, as its investments look to pay off.
Of course, the easy money has already been made. But that does not mean that aren’t any more gains ahead, especially at these multiples. As the broader market continues its recovery, I view the investing side as a very powerful set of legs that could extend Fairfax’s epic rally. On the insurance side, things are also looking up.
Simply put, Prem Watsa has shown he’s still a skilled top boss. At around 10.5 times trailing price to earnings (P/E), I view Fairfax as a value stock that just so happens to have momentum at its back.
Couche-Tard is another hot stock that some may be reluctant to chase. The stock recently slipped just north of 4% from its new all-time high of around $68 per share. I think the dip is buyable, as the company continues bringing things into high gear. With a strong balance sheet that it could put to work on acquisitions in the retail space (grocer or more convenience stores), Couche-Tard’s current rally has pretty strong legs.
Further, as high inflation sticks around, I’d look for Couche-Tard’s private label to continue being a strong point for the firm. Consumers still desire convenience, but they also want a great deal. With a strong private label, Couche can give customers what they want. As the company looks to new technologies and product categories, I continue to view Couche-Tard stock as a staple for any long-term retirement fund.
At around 17 times trailing P/E, Couche is hardly an expensive stock, despite the impressive-looking chart!