The stock market saw tepid growth as the central banks paused rate hikes to let the high interest rates seep in. Burdened with the rising cost of debt, consumer spending has weakened.
Today, the TSX Composite Index fell, as the August inflation numbers surged to 4.1% (from 3.8% in July). Moreover, the U.S. Fed kept the interest rate unchanged but warned of a rate hike towards the end of the year. The Fed hinted that it could keep the rates above 5% throughout 2024. How long can the economy hold a +5% rate? These updates spark recessionary fears.
Uncertainty breeds the opportunity to buy value stocks with strong balance sheets that can withstand a crisis and return to their long-term growth trends.
Three value stocks under $50 to buy in September
I have identified three value stocks that have fallen significantly due to a bearish market. They have secular growth trends and could add value to your portfolio in the long term.
Bombardier stock
The turnaround business jet maker Bombardier (TSX: BBD.B) is in a fundamentally strong position with positive cash flows, rising order book, and no significant debt maturities till 2025. Despite things going in its favour, the stock fell below the $50 price for the first time since November 2020, as it faces pressure from the bear market momentum.
Bombardier stock is trading at 7.89 times its forward earnings per share (EPS), which might look expensive for a company that has just come out of negative EPS. But this is an attractive value if you look at the stock with a five-year investment horizon. Bombardier has a healthy order book of US$14.9 billion, with the majority of its clients being high-net-worth individuals who remain unaffected by inflation. A possible economic recession could push the orders to a future date, but Bombardier doesn’t see any delays at this point.
Moreover, it maintains its 2025 target of growing revenue and adjusted EBITDA to US$9 billion and US$1.6 billion, respectively. A US$6.9 billion revenue company has an enterprise value (debt+equity) of US$11.45 billion today. It is a good value, considering it could become a $9 billion revenue company with a lower debt in two years.
Power Corporation of Canada stock
Power Corporation of Canada (TSX: POW) is a financial services holding company, with its largest operating company being Great-West Life. Great-West rebalanced its portfolio:
- It sold its loss-making venture Putnam Investments to Franklin Resources.
- It sold individual onshore protection business of Canada Life U.K. to Countrywide Assured.
- It acquired Investment Planning Counsel and Value Partners.
Investing in POW is less risky as operational risk is borne by its operating companies. The holding company does not have debt on its balance sheet. Its main income source is the dividends paid by operating companies. Hence, POW is a good investment to earn constant dividends. Its key income sources, Great-West and IGM Financial, have reported stable earnings.
POW stock is a buy at the dip, as you can lock in higher dividends.
Enbridge stock
Enbridge (TSX: ENB) stock has fallen more than 12% year to date. The pipeline company is acquiring Dominion Energy’s three gas utility operations for US$9.4 billion cash. The move comes as Enbridge looks to tap North America’s liquified natural gas export market. It has accelerated investment in gas pipelines, and the acquisition will complement its organic expansion.
Concerns that a large acquisition in a weak economy could increase Enbridge’s debt burden pulled the stock down. However, the company has a record of successfully completing acquisitions and withstanding crises without a dividend cut. Moreover, the acquisition will be immediately accretive to Enbridge’s earnings. Now is a good time to buy Enbridge stock and lock in a higher dividend yield.
Investor takeaway
Weaker markets often make investors fearful about stocks as all stocks fall. However, the above stocks have the fundamentals to withstand the economic downturn and return to realize their long-term growth drivers.
