The recent TSX stock market malaise can be a challenge if you are an investor. Declining stocks can often lead investors to make drastic and irrational sell decisions. If you own quality stocks, often the best thing to do is sit on your hands and do nothing.
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Tough markets can reveal troubled businesses and opportunities
However, sometimes tough markets also show that certain businesses may not be as good as they once seemed. Investors need to discern the difference between general market weakness and fundamental business weakness.
If it is general market weakness, you can often pick up stocks in great businesses at fair or even great prices. You can use market dislocation to your advantage. If you are looking for some stocks to buy this month, here are two that I would buy and one I would avoid.
A TSX tech stock with a rich balance sheet
If you don’t want interest rate risk, you might want to look at Enghouse Systems (TSX: ENGH). This TSX software stock is sitting with close to $250 million of cash and no debt on its balance sheet.
The company generates a lot of cash from its communication, networking, and asset software solutions. Over the past few years, it has generated around $100 million of spare excess cash.
Traditionally, this company has fuelled growth by making smart acquisitions. The software company aggregator tends to target 15%-plus annual returns on its acquisitions. However, it has had a hard time deploying capital due to elevated valuations in the past few years.
With the economy weakening, Enghouse should be able to sweep up financially distressed software service companies. The acquirer has made three bargain-priced acquisitions already in 2023.
If the software environment continues to weaken, it should get some great opportunities to profitably deploy its cash-rich balance sheet.
A beaten up TSX stock with a strong business
Another TSX stock that is starting to look like an attractive buy for the long term is Calian Group (TSX: CGY). This stock is down 27% this year. With a price-to-earnings (P/E) ratio of 12, it is trading at its cheapest valuation in five years.
Calian operates a diversified mix of healthcare, training, satcom, and cybersecurity businesses. Many of its contracts are with government agencies, so its revenue streams tend to be quite secure. Like Enghouse, it has grown by making smart acquisitions.
This TSX stock did have a weak quarter, but management was very quick to rightsize their cost structure and focus on preserving margins. Like Enghouse, Calian sits with around $23 million of net cash, so interest rate risk is limited.
A big dividend but I wouldn’t buy it
One TSX stock that I wouldn’t want to buy right now is Enbridge (TSX: ENB). Sure, it is yielding over 8% right now. Likewise, the company owns some great infrastructure assets.
However, the company has utilized excessive amounts of leverage and equity to finance its growth. Unfortunately, in a higher rate environment, its business looks less sustainable than it did even a year ago.
Enbridge is sitting with over $79 billion of debt on its balance sheet. That makes up close to 45% of its enterprise value.
The company just announced a major acquisition of three U.S. gas utilities, adding close to $15 billion of debt. In addition, the company issued equity that diluted shareholders by around 4%.
Overall, the deal doesn’t look like a good bargain for shareholders. Enbridge paid a premium to its own valuation. As a result, it will need to unlock significant synergies (which is unlikely) to make the deal accretive.
From a total return perspective, Enbridge doesn’t look like a good TSX stock for long-term shareholders.
