August saw a market pullback as the effects of high interest rates and inflation reduced the profits of several companies. But the bear market also pulled down fundamentally strong stocks. It is at times like these that value stocks emerge. While investors are selling over fears of recession, it is time to buy some value stocks on the dip.
Two stocks your future self will thank you for buying today
Remember the 2020 pandemic when some strong stocks fell over the fear of an uncertain future? Had you invested in them throughout the dip, your investments would have outperformed the market.
I have identified two companies with strong business models and future growth potential. But their stock price has fallen prey to a short-term market slowdown. If you buy them at today’s prices, your future self will thank you for being brave and buying them on the dip.
Descartes Systems
Descartes Systems (TSX: DSG) has yet to report its second-quarter earnings. But looking at the overall businesses and e-commerce activity, many businesses lowered their 2023 outlook. Descartes could post subdued revenue growth. Investors have already priced weakness into its stock price, which fell almost 6% in the first half of August. But the overall economic weakness is temporary.
Even if the economy falls into a recession, Descartes has $182 million in cash reserves, equivalent to 12 months of its operating expenses. As far as revenue is concerned, trade will keep its revenue growing in the single digits. A slowdown in revenue could reduce its profit margins slightly. But the company’s fundamentals will recover with the economy.
Every crisis brings an opportunity to improve efficiency. Descartes Systems helps companies keep their supply chains and logistics efficient. Because the company runs a tight ship, its revenue growth rate accelerates after every slowdown.
Descartes stock fell 29% below $45 during the March 2020 crash. Had you invested $2,000 then, your money would have doubled to $4,356. A similar opportunity is at hand. The stock is a buy below $100 as it has the potential to surge past $180 in three to five years as it rides the future e-commerce trend.
Bombardier stock
Bombardier (TSX: BBD.B) stock fell more than 20% in August even after reporting strong second-quarter earnings. The business jet maker also maintained its 2023 outlook to deliver 138 aircraft this year, which means the company has not seen any demand weakness, so far. Bombardier’s CEO was hoping for a demand recovery from China. But looking at the nation’s economy, demand recovery could probably take longer. Nevertheless, Bombardier didn’t incorporate China’s recovery in its guidance.
Moreover, Bombardier has no debt maturing until 2025, and the company will likely pay off the 2025 debt as it looks to maintain an 18-to-24 month debt maturity runway. This accelerated debt reduction from over US$10 billion in 2020 to US$5.6 billion in March 2023, helping Bombardier improve its credit rating and reduce its liquidity requirement to US$1–$1.5 billion.
Bombardier could see a pullback in revenue in a recession as some clients might delay their aircraft deliveries. But this time, it is better positioned to withstand a recession.
Now is a good time to buy the stock as it is so far on target to achieve its 2025 revenue target of US$9 billion. This stock could double your money in three to five years. I did not consider its run-up since the March 2020 market crash as that was the time when it was undergoing a turnaround from near bankruptcy to profitability under new leadership. The returns during such a turnaround are difficult to replicate once the stock price reflects the company’s true value.
Investing tip
The two stocks are a buy throughout the market dip. As it is impossible to time the market, you can invest $250 to $500 in each of the two stocks every time they make a new low. If there is a market crash, your average stock price will reduce. These stocks could revive during the recovery rally and give you better returns.
