July saw a continued rally in tech stocks and a dip in dividend stocks and real estate investment trusts. Canada’s inflation eased to 2.8% in June 2023, encouraging investors to return to growth stocks with lower debt.
But dividend stocks and REITs fell as the Bank of Canada increased interest rate to 5% in July, adding to higher mortgage interest. Economists believe the bank might pause the rate hike and keep it stable for some time before reducing interest rates.
In light of the macroeconomic developments, it is time to change your stock preferences. Consider buying those at their lows and avoid ones at their highs.
Image source: Getty Images
Two TSX stocks to buy in July
The rising interest rate has pulled down prices of high-debt stocks like TC Energy (TSX: TRP) and Bombardier (TSX: BBD.B). However, they have strong fundamentals to absorb the higher interest and continue growth in the long term.
TC Energy
This stock has been hovering around its 52-week low since the oil leak in its Keystone pipeline in December 2022. It again touched its low in March after its Coastal GasLink pipeline went over budget by another $1.4 billion. The company took a hit of $3 billion on its 2022 profit to make up for the additional cost.
TRP touched its low again in July, as the company lost a lawsuit from shareholders of Columbia Pipeline, which it acquired in 2016. The ruling could bring a claim of less than $400 million, which TC Energy may or may not appeal. But such lawsuits do not affect the pipeline operator’s operations. In the worst-case scenario, TRP will absorb the claim cost. It will still have enough cash to pay dividends, grow them, and fund its upcoming gas pipeline projects.
TC Energy is tapping the North American natural gas export market that could generate significant cash flows once pipelines are operational. If you buy this stock now and hold it for 10 years, you can lock in a 7.3% dividend yield. The dividend could grow faster than the 2.8% inflation.
Bombardier
Bombardier stock has shown a spectacular +500% growth since mid-2020. It became the turnaround story from a near bankruptcy to growing profitability materialized. The business jet maker reduced its debt by 45% in two years to $5.6 billion and plans to reduce it by another $1 billion by 2025.
The company expects strong demand for business jets (375 aircraft) in the next 10 years, with major demand from high-net-worth individuals and surveillance. It is also focusing on altering its business jets for defence. Bombardier is considering participating in the Canadian government’s defence contract if they open the order for bidding instead of giving it to Boeing. Apart from aircraft deliveries, the company is increasing its share of aftermarket service revenue, which could improve profitability.
Bombardier stock has dipped 20% from its April high on rising interest rates. Now is a good time to buy the stock as it has the potential to grow significantly in 10 years once concerns around recession ease.
TSX stock to avoid in July
Shopify (TSX: SHOP) stock more than doubled in a year and is trading near its high. After losing 80% valuation in the 2022 tech stock bubble burst, a recovery was expected. It is because Shopify’s revenue and merchandise volume growth slowed as high inflation impacted consumer spending.
The company reversed its pandemic expansion plans and returned to an asset-light model by cutting jobs and offloading the logistics business. Investors priced in these efforts and pushed the stock price up 109%. The stock seems to have reached its peak valuation with no further growth in sight.
While Shopify is a good stock, you are better off avoiding buying at its current price. If you own Shopify stocks, you could consider selling them and using the profits to invest in Bombardier and TC Energy.
