The Canadian recession that may touchdown at some point over the next year has been weighing heavily on Tax-Free Savings Account (TFSA) investors for many quarters now. Indeed, whenever you expect and prepare for the worst, and the actual situation isn’t nearly as bad, you could have a stage set for some pretty decent results.
Indeed, what types of stocks are to be avoided at all costs in the face of a potential economic recession? It’s the cyclicals, discretionaries, and firms that have quite a bit of economic sensitivity. It’s these stocks that could have the most to shed once things really start getting ugly in the economy. Of course, shares of such “risk-on” companies tend to boom when the economy is ready to recover and return to running at full speed!
Recession: Still on or not?
At this juncture, the market seems to be giving mixed signals. On one hand, it’s staying cautious on some of the discretionary names. However, at the same time, certain areas of the market have been astoundingly resilient. Air travel, which tends to get crushed at the first signs of economic weakness, has been doing incredibly well so far this year. Now, things could turn on a dime. Regardless, certain pundits out there think that the strength could last, even if recession jitters grip TFSA investors again.
In any case, the 2022 market sell-off seems to have had a cathartic effect. Though I still think Canadian investors should be ready to invest through a mild recession, I also think it’s time to start thinking about inching back into the riskier stocks that could possess the most upside over the next two to three years.
Indeed, as long-term TFSA investors, we should be thinking about the next few years, not just the next week, month, or quarter!
Magna International (TSX:MG) is an auto-part maker that’s already seen shares sink into a funk. At its worst, the stock sunk around 46% between the 2021 high and the 2022 low. Today, the stock is sitting down around 33%, thanks in part to a recent bounce and a decent second quarter. For the second quarter (Q2), earnings per share (EPS) came in at $1.50, a tad better than expectations of $1.23. Revenue was also decent at $11.0 billion.
I think the earnings strength could sustain a rally to much higher levels. In recent sessions, we’ve witnessed some nice price target upgrades from analysts. Indeed, the “risky” cyclical seems to be full of potential. And if the auto market can drive through macro headwinds, I think there’s an amplified upside to be had.
Leon’s Furniture (TSX:LNF) is one of my favourite Canadian discretionaries to own if you’re looking to play a consumer-spending recovery. Indeed, demand for big-ticket furnishings has taken a bit of a hit amid recent macro pressures. If a recession weighs more heavily, LNF stock could easily see recent gains be wiped out. However, if demand heals further, I’d not be shocked if LNF stock aims for its highs of around $25 per share by year’s end.
The company is well run, with shares that look cheap at 8.6 times trailing price to earnings. With a juicy 3.02% dividend yield, LNF stock is a risk worth taking for TFSA investors!