Rising interest rates since 2022 have hit stocks hard, including many growth stocks. Yet, it’s still a good idea to have a good portion of your portfolio in growth stocks for the potential to create substantial long-term wealth.
Stella-Jones
Stella-Jones (TSX: SJ) manufactures pressure-treated wood products, including utility poles, railway ties, and residential lumber. About 70% of its sales are in the United States. The forest products stock just had a super run, more than doubling from the bottom in mid-2022.
Management has been solid in its capital allocation. The company’s five-year return on invested capital is north of 10%. As well, its five-year return on equity is approximately 14.7%. Its five-year return on assets is also quite good at over 8%.
At $68.74 per share at writing, SJ stock only offers a dividend yield of approximately 1.3%. So, investors should target price appreciation from the name. That said, Stella-Jones is a dividend grower. It has increased its dividend for about 18 consecutive years with a 10-year dividend-growth rate of 12.7%.
With acquisitions, it’s possible for SJ to grow earnings by about 10% per year. At its recent quotation, it is reasonably priced at about 14.7 times adjusted earnings. Analysts think the stock trades at a discount of 10%.
Canadian Pacific
After merging with Kansas City Southern and therefore expanding its footprint into Mexico, Canadian Pacific Kansas City’s (TSX: CP) growth prospects are as bright as ever. In fact, it forecasts to grow its adjusted earnings per share by about 20% annually over the next couple of years.
Its adjusted earnings multiple of about 26 at $99.41 per share doesn’t seem expensive, as it would represent a PEG (price-to-earnings-to-growth) ratio of 1.3. Sure enough, the 12-month analyst consensus price target suggests a discount of close to 16% in the growth stock.
Investors should note, though, that during recessions, railway stocks like Canadian Pacific tend to fall. Economists predict that there’s a higher probability than normal for a recession by 2024 in Canada and the United States. Investors looking for a bigger margin of safety can look to see if they can buy shares at the $75-89 range, which represents another drop of 10-25%.
goeasy
Perhaps the best value of the three stocks is goeasy (TSX: GSY), whose return on assets and return on invested capital shrank to below 5% in 2022 in a rising interest rate environment. Its return on equity of about 16.9% for the year was not bad, although it was meaningfully lower than its five-year return on equity of 26.6%.
Indeed, the leading non-prime Canadian lender is set to experience greater challenges with more federal regulation for the industry, including a cap of 35% on the annual interest rate it can charge. Thankfully, this would have a lesser impact on goeasy, which was already decreasing its interest rates over time to reward consumers who are diligent in improving their credit scores.
A certain percentage of the population will always rely on credit services provided by goeasy. So, the growth stock has a good chance of delivering double-digit growth over the long run. It’s helpful for investors that the dividend stock also offers a dividend yield of about 3.4%. At $113.50 per share at writing, GSY trades at about 8.7 times adjusted earnings. Analysts believe the undervalued stock offers a whopping discount of close to 35%.
Outperformance
SJ, CP, GSY, and XIU Total Return Level data by YCharts
All three stocks have outperformed the Canadian stock market in the last 10 years. Assuming an investment of the same amount across the three stocks, they have a good chance of delivering total returns of at least 12% per year. According to the Rule of 72, that would imply doubling one’s money in six years.
If you’re starting from scratch and able to invest $10,000 each year for total returns of 12% per year, it’ll take you just less than 23 years to achieve $1,000,000.
