The equity market regularly throws up opportunities for investors to scoop up quality shares at a discount. However, just a handful of companies have the potential to generate outsized returns consistently for long-term shareholders.
Here are two TSX stocks you can buy and one you should avoid buying this month.
ATS Automation stock
Valued at $5.6 billion by market cap, ATS Automation (TSX: ATS) provides enterprise-facing automation solutions. It is involved in the planning, designing, building, commissioning, and servicing of automated manufacturing and assembly products.
Despite a challenging macro environment, the company increased revenue by 24.9% year over year to $735.7 million in the fiscal second quarter (Q2) of 2024 (ended in September). Comparatively, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose by 29.4% to $116.2 million, while earnings were up 20% at $0.63 per share in the quarter. Further, ATS ended Q2 with an order backlog of $2 billion, rising 12.4% year over year.
ATS expects the life sciences funnel for fiscal 2024 to remain strong, with verticals such as pharmaceuticals and medical devices driving demand. The TSX stock has surged 325% in the last 10 years. Despite these market-thumping gains, ATS stock trades at 19.6 times forward earnings, which is not too expensive.
Analysts remain bullish and expect ATS to return 14% in the next 12 months.
Toromont Industries stock
Another TSX gem, Toromont Industries (TSX: TIH) has returned over 400% since December 2013 after adjusting for dividends. Valued at $9.4 billion, Toromont Industries provides specialized capital equipment in North America and other international markets.
While it is part of a capital-intensive industry, Toromont’s strong financial position allows it to navigate the ongoing period of interest rate hikes. Its leverage ratio represented as net-debt-to-total capitalization was -7% in Q3, reflecting significant investments it made in working capital and capital assets to support current and future growth.
Toromont’s board of directors also approved a quarterly dividend of $0.43 per share, indicating a yield of 1.5%. Its stable and predictable cash flows have allowed the TSX stock to raise dividends by 11.4% annually in the last two decades, enhancing the effective yield over time.
Priced at 18.9 times forward earnings, Toromont stock is quite cheap and trades at a discount of 12% to consensus price target estimates.
Suncor Energy stock
The TSX stock you need to avoid is Suncor Energy (TSX: SU), which is part of a highly cyclical sector. Generally, energy stocks earn generous profits during periods of market expansion and trail the broader markets during economic recessions.
The threat of an upcoming downturn coupled with rising interest rates and tepid consumer spending are bound to act as headwinds for Suncor Energy and its peers.
Suncor currently pays shareholders an annual dividend of $2.18 per share, translating to a yield of over 5%. Moreover, priced at seven times forward earnings, Suncor stock is quite cheap and trades at a discount of 30% to consensus price target estimates. However, its adjusted earnings are forecast to narrow from $8.34 per share in 2022 to $5.91 per share in 2024.
