2 Stocks to Add to Your Portfolio in a Market Pullback

The TSX may be due for a pullback in the next few months. Here are two top Canadian stocks I’d buy when it does.

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So far, 2024 has started off with a bang for the Canadian stock market. Many of Canada’s top tech and growth stocks are hitting new 52-week highs. Investor exuberance has seemingly recovered after a very volatile year in 2023.

The only problem with this is that stocks have soared, and valuations looked stretched. If you have cash to deploy into stocks, it is getting harder and harder to find bargains on the TSX.

The good news is that there will be an inevitable pullback. Who knows what will spook the market? Undoubtedly, there will be opportunities at some point this year. Last year alone, the TSX dropped 5% or more over four times! The opportunities will come.

If you are wondering what types of stocks to buy on pullbacks, here are two that would be serious buys if they pulled back.

CSU: One of Canada’s best stocks, but you must pay a big price tag

Constellation Software (TSX:CSU) has climbed 9% in 2024 and 57% over the past 52 weeks. It trades for $3,555.39 per share! The company has impressed the market with its ability to keep deploying its cash at high rates of return.

It has traditionally grown by acquiring small, niche software businesses. However, in 2021, it announced a shift to begin deploying capital into larger businesses as well.

Last year, it exceeded expectations in that regard. It acquired several large carve-out businesses from other tech businesses.

Given its success, the stock has gotten pricey. It trades with a price-to-sales ratio of six, a trailing price-to-earnings ratio of 108, and a price-to-free cash flow ratio (a more accurate measure of profits) of 26.

I’d wait for a pullback to add this stock. Those pullbacks don’t occur often, and they don’t last long. As a result, you might be waiting a while, and you will need to act quickly when it happens.

ATD: This retail business had a strong 2023, but the valuation is a tad stretched

Another stock to buy on a pullback is Alimentation Couche-Tard (TSX:ATD). The company has risen 26% over the past 52 weeks. With a price-to-earnings ratio of 18.8 times, it is starting to reach the higher end of its five-year valuation range. It is a little closer to being fairly valued than a bargain today.

Couche-Tard is one of the largest operators of convenience stores and gas stations in the world. It has the scale, brand power, and geographic reach to take market share and earn industry-leading margins. It just became larger after adding a major multi-country acquisition in Europe.

In recent quarters, the company has faced some near-term headwinds due to declining fuel margins, slowing cigarette sales, and a weaker consumer. The European acquisition may help offset some of this. However, if the economy continues to weaken, Couche-Tard’s stock could be a short-term victim.

If you can look past the potential weakness, Couche-Tard could be a great long-term investment. This stock generates a lot of cash, buys back lots of stock, and has a great history of smart capital allocation/shareholder returns. A pullback could be an excellent time to add this stock to your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown has positions in Constellation Software. The Motley Fool has positions in and recommends Alimentation Couche-Tard. The Motley Fool recommends Constellation Software. The Motley Fool has a disclosure policy.

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