A stock market correction is only natural, and perhaps even healthy as well as desired after a hot rally in the broader markets. Indeed, the market rally kicked off with tech, led higher by AI technologies. Then, the strength spread across a wide range of sectors. With tech exhibiting a bit of weakness (or slowed momentum at the very least), I do think investors should have a game plan should broader markets fall into some sort of correction.
Even as investor sentiment improves, one must never rule out the occurrence of a market correction. Indeed, when it seems like things are good and greed is in the air, a correction may be needed to temper enthusiasm and bring valuations to more reasonable levels. At the end of the day, the market should be expected to get ahead of itself, whether it means underpricing stocks after a bear market or overpricing them after a hot run.
Correction prep 101
In this piece, we’ll consider two intriguing value stocks that can help keep your portfolio relatively safe as the tides go out and the markets correct. Of course, corrections should be viewed more as opportunities to buy more shares at lower prices. However, we can all admit that it’s never fun to be in the middle of one. Watching your portfolio shed 10% (or more) doesn’t feel great!
In any case, investors with cash on the sidelines can turn corrections into opportunities to improve their risk/reward.
Without further ado, let’s check out three plays that I think may be spared from the next painful pullback.
Fortis
Fortis (TSX:FTS) may be a yawn-worthy utility, but I find the recent pullback to be a tad overdone. Shares are off around 12% from 52-week highs, even with decent quarters in the books. The 18.5 times trailing price-to-earnings multiple seems too low. And with a 4.2% dividend yield, I find FTS stock to be oversold and overdue for some sort of relief bounce, whether or not markets fall into a correction in the second half.
With a 0.19 beta, FTS stock has a really low correlation to markets. If stocks were to correct 10%, I’d not be surprised to see Fortis holding steady, or perhaps eking out a gain. Either way, I like the resilient cash flows and valuation at these levels. Sure, risk-free assets may be more tempting. However, Fortis seems like a steady foundation that ought to be nibbled at any time it corrects.
TD Bank
The bank stocks have been anything but safe over the past year. Remember the U.S. regional banking woes earlier this year? It was quite a weird time for bank shareholders. These days, the bank stocks are climbing back, with TD Bank (TSX:TD) stock up 12% from its May 2023 lows. I think there’s more room to run, as investors reconsider the neglected value plays.
The stock yields 4.44%, with a 10.8 times trailing price-to-earnings multiple. Sure, earnings could continue to feel the hit of macro headwinds. However, I think the damage has been so excessive such that there may not be too much downside risk from current levels. Even if a correction strikes the TSX Index, I view TD stock as in a spot to outperform from here. It’s recovering, and I don’t see too much that could derail it.
