Every business eventually faces a rough patch. If they sustain the difficult times, they grow stronger. Here are three stocks that are down but far from out. Once they are out of the woods, they could become the growth catalysts in your portfolio.
Magna stock
It all began in 2022 when the chip supply shortage created a large inventory for automakers, as thousands of cars were waiting to be shipped once the chips arrived. From there began a series of events beyond the control of auto component maker Magna International (TSX:MG). Since January 2022, the stock has dipped 45%. During this time, the auto parts maker increased its leverage while restructuring its operations to improve profitability.
Magna saw 13% revenue growth in 2023 as the chip supply shortage eased and cars were shipped. It gave an optimistic medium-term outlook for 2026 in its 2023 earnings over hopes that light car and truck sales will increase. However, the first-quarter 2024 earnings disappointed analysts and investors alike. The company reduced its 2024 outlook as the macroeconomic conditions are not favourable for vehicle buying. High interest rates and rising oil and gas prices are making cars unaffordable.
Cars are discretionary spending and face a downtrend in a weak economy. Magna is hanging onto hopes of the internal combustion engine (ICE) to electric vehicle (EV) transition, which is a long process. This secular trend remains intact. Management is optimistic about achieving its 2026 target of US$48.8 billion to US$51.2 billion in revenue and a 7–7.7% adjusted earnings before interest and tax (EBIT) margin.
Even though Magna increased its debt to US$8 billion, it is 1.8 times its EBIT, which means it has the financial flexibility to sustain this rough patch. Moreover, it is ready for a recovery in demand with advanced technologies and sufficient capacity. Magna is down but not out. It will be a beneficiary of the cyclical uptrend.
BCE stock
BCE (TSX:BCE) stock has been in the woods since 2022, falling 35%. It is now restructuring from telco to techno to prepare itself for the 5G opportunity. The 5G era will bring real-time artificial intelligence (AI) to the edge. Everything from cars, traffic signals, security cameras, and drones is connected to the internet and processing data in real-time on the cloud.
This type of digital transformation needs services like cloud, digital ads, and cybersecurity. That is where BCE is investing as it looks to capitalize on the 5G opportunity.
However, it is facing some obstacles as the regulator wants it to share its network with competitors. Until BCE and the regulator reach a middle ground and convert this adversity to opportunity, the company will see some pullback in its profits and free cash flows. While BCE is down, it is far from out, as the secular trend of 5G will act as a growth catalyst for this stock.
Air Canada
Air Canada (TSX:AC) stock’s seasonal take-off in the second quarter reversed course after the airline reported a net loss of $81 million in the first quarter. The stock surged 15.6% between March and May 1 and fell 14% after earnings. The loss negates the profits and recovery the airline achieved in the last two years, where its 2023 net income of $2.3 billion surpassed the 2019 level of $1.5 billion.
Are investors overreacting to this loss? I believe they are. They never priced in the rising profits and the falling net debt, which almost halved to $3.8 billion from $7.5 billion in 2022. Also, the first-quarter loss was temporary as Air Canada saw the return of corporate travellers who have been absent since the pandemic.
Business travellers contribute significantly to an airline’s profits. But this sudden traffic caught AC by surprise. It was forced to fly older, less fuel-efficient planes. Moreover, a hike in pilot salaries increased AC’s labour expenses by 21%. The airline has ordered 80-plus new aircraft, and a return of business travel could help it absorb the higher labour cost and achieve its 2024 target of $3.7 billion to $4.2 billion in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization).
