Just because a stock is down, it doesn’t mean investors should stay away. In fact, it may be time to buy (more). Here are three TSX stocks that are down but not out of the game. They have turnaround potential.
Linamar
Compared to Linamar’s (TSX:LNR) larger peer, Magna International, it is less leveraged and offers a smaller dividend yield. Therefore, investors would primarily focus on price appreciation from Linamar. As a cyclical stock, it gets its fair share of volatility. Yahoo Finance’s recent beta of about 1.5 suggests Linamar stock is about 1.5 times as volatile as the stock market.
The stock is down 15% from its peak in July. Miraculously, the profitable company’s stock has remained in an upward trend since the bottom in May 2022, in a rising interest rate environment.
At $65.52 per share at writing, Linamar stock trades at about 8.3 times adjusted earnings, which indicates a discount of about 19% from its long-term normal valuation. The 12-month analyst consensus price target calls for an even greater discount of close to 26%. What’s noteworthy, though, is that in a recession, Linamar stock is almost certain to experience greater pressure. Subsequently, in an economic expansion, it’s possible to deliver double-digit earnings growth as there would be increased demand for auto parts just like in the past.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) has been the worst-performing big Canadian bank stock in the last 5 and 10 years. However, it could make a comeback in an economic expansion scenario given it has greater exposure to higher-risk but potentially faster-growing international markets.
In the last decade, Bank of Nova Scotia stock only delivered total returns of approximately 63% compared to roughly 127% in the period for the BMO Equal Weight Banks Index ETF, a proxy for the big Canadian bank stocks.
At a multi-year low today, at $59.41 per share, BNS stock trades at a cheap price-to-earnings ratio of about 8.3. At this level, investors can lock in a massive dividend yield of just over 7.1% for income. It should be able to keep its dividend safe and increase it over time. Surely, the undervalued stock offers solid returns and a margin of safety for long-term investing.
Brookfield Infrastructure Partners
Brookfield Infrastructure Partners L.P. (TSX:BIP.UN) stock has declined 19% over the last 12 months, which is much worse than the market’s ascension of almost 3% over the period. It is a fabulous opportunity to buy units of the global infrastructure company on the cheap, as it now offers an elevated cash distribution yield of close to 5.5%.
The business is built to generate quality cash flows that are highly contracted. The cash flows currently have a weighted average term of 10 years and are predominantly indexed to inflation so it should have little impact from the relatively high inflationary environment. Furthermore, management sees substantial growth opportunities in its data centre platform, which it expects to increase its operational capacity 3.5 times by 2026.
The top utility stock is also a believer of growing its cash distribution over time. It intends to increase its dividend by 5-9% per year. At $38.33 per unit, analysts believe the stock is on sale with a big discount of about 37%. So, buyers of the stock today can enjoy awesome income as BIP.UN has a high probability of having strong price appreciation in the long run.
