The TSX Composite Index dropped 4.5% in August, as the second-quarter earnings disappointed investors. The higher interest rate started to seep into the corporate earnings, leading to weaker profits. While some anticipate a recession, some anticipate no recession. This mixed expectation has kept the stock market in a bull-and-bear momentum. The market seems to be recovering in September, as investors expect the central bank interest rate hikes to pause.
Three stocks to buy ahead of September rally
It is the time to buy these fundamentally strong stocks at their dip before the stock market recovers ahead of September.
Bombardier stock
Bombardier (TSX: BBD.B) stock dipped 23% in August, despite reporting strong second-quarter earnings. The business jet maker maintained its 2023 guidance and improved its credit rating. However, hopes of demand recovery from China have stalled as the Asian nation struggles to recover from the Covid effect.
The way the stock has been moving throughout the year, every steep dip of 15-20% is followed by an equally steep rally of +20%. The stock is trading below $55 but could surge past $65 as buying picks up. You could use this stock to make some quick gains of $10 per stock. Or you can hold this stock for the long term, as the company is in the middle of a turnaround.
However, I would suggest booking quick profits for now because a recession could halve the stock. You can pick up more than double the shares for the same amount at the dip. Bombardier has the potential to recover from a recession and achieve its 2025 targets. A turnaround stock tends to outperform the market.
Magna stock
I am bullish on Magna International’s (TSX: MG) long-term growth prospects. Semiconductor companies from Nvidia to Qualcomm are investing in research to make cars autonomous. It hints that autonomous cars are the future. Magna is smelling an opportunity in contract manufacturing for complete automotive assembly. Fully autonomous cars will take time to hit the market. They will keep undergoing several upgrades like your PCs and smartphones.
Magna supplies automotive components like body exteriors, power terrain, and vision to major automakers and tech companies that design cars. Its stock suffered from an industry-wide chip supply shortage. But Magna has the potential to ride the electric vehicle (EV) and autonomous vehicle trend. The stock is a buy at the dip, and hold it for the long term, as it can cross its high of +$120. Until then, you can enjoy a 3% annual dividend.
BCE
BCE (TSX: BCE) stock has been declining, down more than 16% since May, as one-off events hit its profits and free cash flow (FCF). However, the telecom giant expects its FCF to recover in the second half. It is slashing jobs in its low-profit margin media division to reduce costs. It’s not just BCE. All telcos, including Rogers and Telus, are slashing jobs to reduce costs.
But among the three, I prefer BCE as it offers a higher dividend yield of 6.86% and manageable debt. Its fluctuating FCF does raise concerns. But it has enough cash reserves to fund capital spending and pay dividends.
Investing tip
The current bull and bear momentum is an opportune time to make some active investments. In a high-interest environment, the key fundamental to look for is net debt and free cash flow. Does the company have sufficient cash in its pocket to pay its bills and service rising debt costs? Is the company revising its guidance?
If the guidance remains constant and the company has a strong balance sheet, it is a stock to buy at all dips. You can accumulate more shares in the case of dividend stocks and lock in a higher yield for the long term. To know which point to buy the stock, look for its 14-day Relative Strength Index (RSI), which measures stock price momentum. If the RSI is below or near 30, the stock is oversold. You could consider buying at that time.
