Stocks are risky investments that are meant for investors with a long-term investment horizon and can ride through volatility. Target to build a diversified portfolio with stocks in different industries and sectors that are not correlated for a portfolio with potentially lower volatility.
Here are a couple of top TSX stocks I’m watching this month. The idea is to invest in stocks that are trading at good valuations and have solid underlying businesses.
TD Bank
The big Canadian bank stocks serve as core holdings for many investment portfolios, including income and retired portfolios. These stocks have been weighed by a higher probability of a recession by next year, making them more attractive for current income and long-term investment.
In particular, Toronto-Dominion Bank (TSX:TD) stock seems to offer a good blend of value and growth potential. The North American bank, with a retail banking focus, increased its adjusted earnings per share (EPS) at a compound annual growth rate (CAGR) of about 8.5% in the past 10 years.
In the near term, like its peers, the bank’s earnings will be pressured from higher loan-loss provisions. However, in the medium term, it targets an adjusted EPS growth rate of 7-10%, which we believe is achievable given its track record and quality.
Therefore, the stock appears to be a good buy, trading at a discount of about 17% from its long-term normal valuation and offering a relatively high dividend yield of 4.6%.
Granite REIT
From the continued trend in e-commerce, industrial properties remain in demand, as signified by Granite REIT’s (TSX:GRT.UN) high occupancy rate of about 97%. Its 62.8 million square feet portfolio is diversified across 137 income-producing properties and five development properties or land in five countries. Particularly, based on the number of properties, it is primarily focused in the United States and Canada where 46% and 26%, respectively, of its properties reside. The real estate investment trust (REIT) generates about 51% of its revenues in the United States.
Granite REIT offers a decent yield of approximately 4.1%. It has been paying an increasing cash distribution to its unitholders for 12 consecutive years. With a sustainable payout ratio and a weighted average lease expiry of over six years, Granite REIT should be able to keep its monthly cash distribution safe. At $77.70 per unit at writing, analysts believe the undervalued stock trades at a discount of 20%.
Investor takeaway
When stocks go on sale, they are discounted for a reason. In the case of TD Bank, there are worries of an uncertain economy and a higher probability of a recession in Canada and the United States by 2024, especially when interest rates have risen to levels that are relatively high versus the recent history.
Higher interest rates and inflationary pressures could cut into Granite REIT’s bottom line. In a recessionary scenario, online shopping would likely weaken and lead to lower demand for industrial properties, which could trigger a selloff in Granite REIT.
Nonetheless, both are quality businesses that are trading at good valuations with the potential to deliver satisfying total returns over the next three to five years.
