The market’s legs have been going strong for many quarters now. Indeed, tech has been the big winner. Those who bought after the 2022 selloff worked its course now have bragging rights. That said, quick profits can be taken back by a market when the tables turn and greed turns back into fear.
The market tends to move back and forth between pessimism and optimism. If you’ve been around markets for long enough, you’ll know that the seeming good (or horrific) times do not last, even though it feels like such times will go on forever!
To be a true contrarian, you need to lighten up when others back up the truck in a given sector. On the flip side, you need to buy as others sell and give love to some of the sectors that nobody else seems to care for. In 2022, energy stocks finally got a bid higher, as commodities surged while the markets were weighed down by recession fears. For 2023, it’s been the financials that have dragged their feet, with banks sinking lower due to a wide range of negative headlines, many of which may be common knowledge at this point.
If you want to do better than the market averages over time, you’ve got to have more than just common knowledge. It can pay big dividends to bet against conventional wisdom, especially if emotions have gotten a bit out of hand!
Without further ado, here are two undervalued stocks I’ll be watching closely should the market rally begin to exhaust and pull back ever so slightly. Is a stock market correction overdue? Possibly. Will it be a doozy? Nobody knows. Probably not if there’s no hidden risk that’s unearthed, given last year’s ugliness!
Shopify (TSX:SHOP) is a top Canadian tech stock that’s had a pretty good year after last year’s travesty! Shares are up more than 75% year to date, thanks partly to a solid quarter and news of a strategic shift. The company is shifting away from logistics and more towards what it does best: commerce. This time, Shopify is exploring opportunities on the physical sales side, which should act as a nice complement to the robust e-commerce business.
E-commerce is still the bread and butter. And as Shopify prepares for the next expansionary market cycle, there could be a lot of room to soar higher. For now, Shopify stock is a tad too hot over the near to medium term. If a correction is in store for markets, Shopify is one of the names I’d carefully look to consider on weakness. The long-term story is still intact. But that doesn’t mean corrections won’t happen here and there!
Scotiabank (TSX:BNS) is a laggard with flat performance year to date. Shares have been under pressure since peaking back in early 2022. Down around 30% from the top, it’s hard to say when Scotiabank will be able to surge again. Regardless, I think the bank stock is severely oversold and potentially undervalued.
Indeed, shares are off 14% over the past five years! That’s some underwhelming performance. Still, I don’t think investors are giving Scotia enough credit for its long-term international growth prospects. At 9.66 times trailing price to earnings, with a huge 6.54% dividend yield, Scotia is one of my top high-yielding value plays this July.
If the stock inches closer to 2020 depths, I may just have to pick up shares, as the yield tests the 7% mark, even though I’m not an income-oriented investor. Why? The value is starting to get too good to pass up!