TFSA (Tax-Free Savings Account) investors should stick with the highest-quality blue chips that they know and know well. Indeed, it’s all too easy to get caught chasing a hot momentum stock (let’s say the AI stock of the day) with little to no understanding of what the firm actually does, how its market operates, and what the price of admission really is!
As an investor, you should find companies you understand and only pick up shares when the price of admission is at a reasonable level. You don’t need to insist on a deep-value bargain like the ones typically found in market crash conditions. Those only come around every so often, and you shouldn’t sit on the sidelines waiting for a crash. Holding too much cash will leave you feeling the heat of inflation, which has been so stubbornly high in recent years.
Fortunately, we all expect inflation to keep calming from here. With lower inflation could come lower rates. But don’t expect rates to nosedive at the same pace of inflation. Central banks are playing it cautiously so as to not give inflation any chance of getting back up after it’s been knocked down!
So, for the new year, new TFSA investors should stick with cheap blue chips with predictable growth and cash flows. Without further ado, please consider CN Rail (TSX:CNR) and Constellation Software (TSX:CSU).
CN Rail
CN Rail has been quite the snooze this year, with shares down around 1.6% year to date. Indeed, the railways have been a pain trade this year, and though the recent rally off October’s lows is encouraging, it’s really hard to tell how 2024’s terrain will be, especially if Canada’s unable to avoid a downturn. In any case, I think long-term investors need not fear.
Not at these valuations, with shares going for 21.7 times trailing price to earnings. The stock may not be a bargain, but it’s fairly valued, in my opinion. The real upside could come from a volume surge and a swift recovery for the North American economy. The rails are feeling the pressure, but likely not for long, as management looks to unlock efficiencies where it can while weathering a storm that will not last forever.
At the end of the day, the rails are critical to the North American economy. And as Canada (and the U.S.) do well over the course of many years, so too will rail players like CN. With a dividend yield close to 2%, I’d look to be a buyer rather than a seller.
Constellation Software
Constellation Software is a diversified software firm that knows how to spot value in the mid-cap Canadian tech scene. The company knows how to make smart deals, and it’s likely going to keep on wheeling and dealing over the next 10 years.
At new all-time highs of $3,291 and change, the share price is extremely elevated — as is the price-to-earnings multiple, which is currently at 97.6 times trailing earnings, or 30.89 times forward price to earnings. I’m a tad concerned about the frothy valuation and would look to buy on a pullback. However, for new investors looking to dollar-cost average into the name, I have no issue taking on a small position here.
Just be ready to buy more if shares fall back towards $2,800 per share, a level of support I personally would seek to get in!
