2 Under-the-Radar Stocks Ready for a Turnaround

A pair of under-the-radar but outperforming, dividend-paying mid-cap stocks are poised for a breakout.

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The S&P/TSX Composite Index has gained considerable ground in 2024, despite the high interest rate environment. On May 17, 2024, Canada’s primary stock market notched a new high of 22,465.37. The index is now up 7.19% year to date, powered by the substantial gains in the energy (+22.42%) and materials (+22.09%) sectors.

Based on data from Trading Economics, foreign investors’ holdings in Canadian stocks reached $14.4 billion in March 2024 compared to the $4.3 billion divestment in February. The signs show a turnaround, including a pair of under-the-radar stocks, is underway. 

Following their better-than-expected quarterly results, AltaGas (TSX:ALA) and Element Fleet Management (TSX:EFN) are poised to break out. Both stocks pay dividends, so the earning potential is two-pronged: capital gain and dividends. 

Resilient and durable businesses

AltaGas is as resilient and durable as ever amid a challenging economic environment. The $9.13 billion infrastructure company draws strength and delivers stable cash flows from its two core business segments: Utilities and Midstream. In the first quarter (Q1) of 2024, net income declined 10.3% to $408 million compared to Q1 2023, while normalized earnings before interest, taxes, depreciation, and amortization increased 13.4% year over year to $660 million.

“Performance in the quarter was ahead of our expectations and reflected the purposeful actions we have taken to leverage our growth opportunities, optimize our assets, de-risk the business commercially and financially, and deliver long-term value for our stakeholders,” said Vern Yu, president and chief executive officer (CEO) of AltaGas.

Midstream delivered a robust performance during the quarter compared to the expanding Utilities segment. According to Yu, AltaGas will continue to drive long-term shareholder value by operating with an equity self-funding model. Management will commercially de-risk the business by increasing the tolling, take-or-pay and fee-for-service contracts.

The Pipestone Phase II expansion project is nearly 100% complete and should be AltaGas’s next growth driver. Independent and investment-grade Pipestone Natural Gas Processing Plant clients have signed long-term take-or-pay agreements or multi-year contract extensions.

In addition to strengthening the midstream value chain, the acquired Pipestone assets have improved AltaGas’s long-term commercial profile. At 30.81 per share, the year-to-date gain and trailing one-year price return are 11.9% and 37.98%. Prospective investors can take advantage of the attractive 3.86% dividend yield.  

Positive market dynamics

Expect Element Fleet Management to rise from obscurity very soon. This $9.5 billion company offers car and light-duty vehicles, material handling equipment, and medium and heavy-duty trucks to customers in Canada, Australia, Mexico, New Zealand, and the United States. The product offerings help reduce the total cost of vehicle ownership.   

The business thrives, as evidenced by the solid revenue growth at the start of the year. In the three months ended March 31, 2024, net revenue climbed 16.3% to a record US$262.5 million versus Q1 2023. Net income rose 19.2% year over year to US$93.8 million.

Its CEO, Laura Dottori-Attanasio, cites the positive market dynamics and resilient client demand for solid services revenue growth. She added that it should enable the company to accelerate some investments in the business in the second quarter.

If you invest today, EFN trades at $24.38 per share (+13.7% year to date) and pays a modest 1.97% dividend. The stock’s overall return in 3.01 years is 84.59%.   

Outperforming mid-cap stocks

Investors should feel confident investing in AltaGas or Element Fleet Management. Besides their flourishing businesses, both are outperforming mid-cap stocks.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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