Magna International (TSX:MG) stock has been lagging this year, with flat results year to date but a somewhat decent 10% gain over the past year. However, the Canadian auto-parts maker remains down more than 37% from its highs. Looking ahead, the road could get bumpier for the discretionary company as the auto industry faces a potential recession.
As you know, the auto industry tends to feel every bump in the economic road. As such, many investors have likely already bailed on the name well before the recession had a chance to make an appearance. It certainly feels like Canadians have had all the time in the world to get ready for the dreaded recession. Though it still hasn’t happened yet, it certainly does feel like it if you’re a shareholder of MG.
Magna: A decent first quarter
In the latest quarter, Magna saw margins contract by quite a bit. Still, the company saw decent revenue growth, and management was confident enough to hike its revenue guidance, albeit very slightly. In any case, Magna still needs to get through several rough quarters. Fortunately, I think the price of admission is in a spot where even a few tough quarters may end up being forgiven by Mr. Market.
Whenever valuations and expectations are depressed, it may not take much for a company to move the needle higher. Undoubtedly, a lot of folks are fully aware of the headwinds ahead. As such headwinds pass, though, it’s the investors who stand by the stock that may have the most to gain.
Catching bottoms in discretionary stocks is not easy, though. You can take an immediate hit to the chin before you start seeing your investment in the green. Despite Magna’s slight revenue guidance hike, which may very well signal good things to come, I think the company is playing it rather conservatively. With recession uncertainties, I’d argue it’s only prudent to be conservative. Overpromising and underdelivering is not a formula for good results.
How can Canadian investors play Magna stock right here?
At writing, shares of Magna trade at $78 and change, with a nice 3.15% dividend yield. With a 1.63 beta, Magna shares are likelier to be more correlated to the broader TSX Index. That means dip-buyers in the name had better be prepared for a very bumpy ride.
The stock goes for 38.5 times trailing price to earnings but just shy of 12 times forward price to earnings. Things are starting to look up for Magna from here if we are in for just a recession that’s mild, short-lived, or shallow. A lot of pundits may be downplaying the severity of a coming downturn. Regardless, I think Magna offers a somewhat decent risk/reward scenario alongside a juicy dividend at this juncture.
Given Magna’s quite a choppy play, I’d be cautious about buying too large a position right here. Perhaps buying a half position here and a half position around the year’s end may be a wise move. It’s never easy to buy a cyclical play ahead of a downturn that everyone sees coming. That said, being brave can accompany greater returns once the tides turn and emphasis returns to the next expansion and the next boom in the autos.
