Markets showed signs of life on Wednesday, as the TSX Index rallied by nearly 2% in a single day. Undoubtedly, investors are starting to get really optimistic (dare I say euphoric) going into the new year. Though the risks seem to be eroding, investors should always be ready for the next pullback, as valuation concerns may be the theme of 2024 should momentum chasers come out of hibernation if they haven’t already come out in full force.
In this piece, we’ll check out two value stocks that are worth watching going into the new year. Depending on your tolerance for risk, they may be worth nibbling on right here as you look to average into a full position over the course of the next few months. Indeed, just because the momentum has returned for the holidays does not mean value has dissipated.
On the TSX Index, the auto-part scene stands out as an overlooked industry that may be able to steer (please, forgive the pun!) a bit higher over the next three to five years. Of course, anything that touches the auto sector is prone to glorious booms and horrific busts.
As we get the temperature of the economy in 2024, with a few rate cuts thrown in, the autos may have what it takes to roll higher. And the Canadian auto-parts makers may be able to garner some upside traction after many years’ worth of painful rollercoaster-like moves.
Without further ado, consider shares of Magna International (TSX:MG) and Linamar (TSX:LNR).
Magna International
Magna stock has been rather sluggish over the past year, sinking by around 8% over the timespan. With a nice 3.35% dividend yield and a modest 15.1 times trailing price-to-earnings (P/E) multiple, I view MG stock as one of those value plays hiding in plain sight.
The $21.2 billion company stands to benefit as consumers look to electrify their vehicles over the coming decades. Indeed, Magna provides numerous parts to the next-generation autos. Though a recession could weigh for several more quarters, I think the post-recession environment bodes very well for Canadian auto parts play.
Recently, Magna teamed up with Telia and Ericsson to improve its ADAS capabilities. Indeed, Magna may not be a tech stock, but it’s still innovating on many fronts. These innovations, I believe, will better equip the firm for the next cyclical upswing. For now, though, investors will need to be patient, as there are still macro headwinds to drive through before any such upswing can take hold. Fortunately, the dividend yield looks impressive enough to hang on for any bumps in the road.
Linamar
Linamar is in the same camp as Magna; it’s a firm operating in the mobility space, and shares have been quite stagnant in recent years. At just 7.7 times trailing P/E, however, the stock stands out as a pretty compelling deep-value play.
Shares rose 3.6% on Wednesday alongside the broad TSX Index. While still flat on a year-to-date basis, I do like the risk/reward scenario through the lens of a long-term investor. The 1.46% dividend yield is less bountiful than Magna’s. However, I think there’s more value in the play at this juncture.
Bottom line
Magna and Linamar look like pockets of value right here. That said, value investors should conduct a careful valuation before loading up on shares, as it’s really hard to tell when the economy will get rolling back up to full speed again. Whether the economy bounces back in 2024, 2025, or 2026, I think a minimum investment horizon of three years will be needed when it comes to the following battered plays.
