Many new investors likely think it’s safe to get back into the stock market waters this December. Indeed, Federal Reserve (the Fed) chairman Jay Powell seems to be taking the role of Santa for the December rally, with his openness to rate cuts in 2024. Undoubtedly, Powell has become a steadfast hawk in recent years. So, the recent dovish commentary was a real shot in the arm of a stock market that’s fresh off one of the most impressive months of the year.
I have no idea if stocks can finish 2023 with a bang. However, I think investors should continue to exercise caution when it comes to stocks that have a considerable amount of momentum behind them and valuations that skew toward the higher end of the range. I think value could triumph in the new year, as the stock market gains begin to broaden out to some of the less-loved names in this market.
Indeed, falling rates may very well be a slight tailwind for the broader basket of firms, many of which may still be low given the new trajectory for rates. Let’s check out two “safety” plays that I think are shaping up to be low-cost plays going into the holidays.
Hydro One
Hydro One (TSX:H) stock isn’t just another snooze-worthy utility stock; it’s one of the widest-moat companies in the sector. And the width of the moat, I believe, warrants a huge premium to the peer group. Just because investors are feeling great again after the past month of impressive gains from left, right, and centre does not mean it’s time to be complacent.
As risk appetite goes up, the contrarian call would be to batten down the hatches with a quality defensive. If recession fears fall further, the price of admission into the safety stocks (like Hydro One) could continue to compress.
Though H stock has been on an incredible 18% run since bottoming in October, I still view the stock as reasonably valued at 21.9 times trailing price to earnings (P/E). I think it’s too cheap for its own good, even if the 3% dividend yield isn’t as competitive as some of its rivals.
The main reason to own H stock for the long term isn’t the dividend, though. It’s the stock’s low correlation to the rest of the stock market. With a 0.26 beta, shares tend to be less influenced by action in the TSX Index. If the TSX gives back some of the recent gains over the coming months, H stock is where I’d want to be!
Loblaw
Loblaw (TSX:L) has been quite the inflation winner, with shares hanging onto the glorious gains booked in 2021 and 2022. For 2023, it’s been a rather flat year. And in 2024, questions linger as to what the next direction will be as inflation withers away and consumer balance sheets improve. As one of the major grocers in Canada, I expect crowds to remain elevated, especially if a recession does make an appearance over the coming quarters.
Either way, Loblaw has great managers and seems poised to fare well, regardless of what the economy is like in a year or two from now. With a 1.41% dividend yield and a mere 18.78 times trailing price-to-earnings multiple, the stock stands out as a great value pick for safe investors.
