The stock market is at a point where the situation could reverse as the calendar year changes. The interest rate hike seems to be nearing its end. Investors are getting bullish, as they expect a rate cut of as much as 1%. That seems like a bullish expectation since the U.S. Fed chair Jerome Powell hinted at a 0.25% cut in 2024. The markets are mixed. Some investors fear a recession in Canada as rising financial stress increases credit risk. Some investors are optimistic and expect higher rate cuts to encourage spending and boost the economy.
Two TSX stocks to invest $1,000 in
Recession or no recession, two stocks are worth buying at their current price.
Air Canada stock
Air Canada (TSX:AC) stock has slipped more than 28% from its seasonal summer peak in July. The airline has come out of the danger zone, handling the pandemic-induced losses and rising fuel costs. With the worst over for the airline industry, Air Canada has returned to profits and one of its highest. As you can see from the table below, the net debt has reduced to 2018 levels while free cash flow has surged to its pre-pandemic high.
| Air Canada’s fundamentals | 2018 | 2019 | 2022 | 9M 2023 |
| Revenue | $18 billion | $19.13 billion | $16.56 billion | $16.658 billion |
| Net Income | $37 million | $1.47 billion | ($1.7 billion) | $2.09 billion |
| Net Debt | $5.2 billion | $2.84 billion | $7.5 billion | $5.438 billion |
| Free Cash Flow | $1.32 billion | $2.07 billion | $796 million | $2.087 billion |
The airline has reduced its total debt by $2 billion to $14.3 billion. Its net debt is 1.4 times its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). While these debt figures might look overwhelming, they are normal for a capital-intensive industry like airlines that operate on thin margins.
The market has pulled down AC stock to its pandemic level on macroeconomic woes, shadowing its strong fundamentals. The equity capital AC raised during the pandemic has diluted shareholders’ interest. It increased its issued and outstanding shares to 358.47 million as of September 30 (from 332 million in December 2020). It is one of the reasons the airline stock is seeing resistance at the $26 price.
Any price below $20 is a sweet spot to buy Air Canada stock and claim a short-term profit when the stock crosses $25 during the seasonal peak.
Magna stock
Magna International (TSX:MG) is a stock that doubled and crossed $120 price when Joe Biden was elected the U.S. president. Behind the rally was the clean energy bill that pushed all electric vehicle (EV) stocks to a new high. However, the industry grappled with several supply bottlenecks after the pandemic recovery. These bottlenecks that pulled Magna stock down 39% from its peak are gradually easing. While there is demand for EVs, the high-interest rate environment has postponed consumer demand until the macro environment revives.
Magna’s stock is trading closer to its pre-pandemic level of above $70. The auto component maker’s fundamentals are improving, with revenue up 15% to US$10.7 billion and diluted earnings per share (EPS) up 37% to US$1.37. If the economy falls into a recession, Magna’s recovery rally could be delayed. But if the economy can avoid a recession, the next three years could see a significant surge in EV sales.
Magna has shown its resilience through difficult times by remaining profitable and maintaining its dividend per share. The stock has already surged 13% since November 1 over expectations of a pause in interest rates. Any cut in interest rate will come as welcome news for those looking to take an auto loan.
Investing tip
A $1,000 investment in the above two stocks could give you more than 30% growth in six months in an economic recovery. But if the economy pulls back, the downside is limited, as these stocks are already near their lows. For those looking for long-term growth, these stocks are worth holding on to for the next three years.
