TFSA Investors: 1 Top Stock Primed for Performance

An outperforming small-cap energy stock is a lucrative investment opportunity for TFSA investors.

| More on:
TFSA and coins

Image source: Getty Images

A year-to-date gain of 101% versus the TSX’s +6.06% makes CES Energy Solutions (TSX:CEU) a top stock pick in June. Besides the market-beating return, the small-cap stock pays a decent 1.76% dividend. In particular, Tax-Free Savings Account (TFSA) investors can earn money in two ways: from price appreciation and dividends.

The Bank of Canada’s interest rate cut on June 5, 2024, was a tailwind and turning point for stocks. If more cuts come, a bull market could ensue. Given its upward trajectory, CES Energy is primed for performance. The energy stock has gained 21.95% in one month, owing to the solid financial results in the first quarter (Q1) of 2024.

Based on market analysts’ buy rating, the 12-month average price target is $8.17, an 18.58% climb from $6.89. Your $7,000 TFSA limit for 2024 allows you to purchase 1,015 shares and generate $123.20 in tax-free passive income.

Business overview

The $1.62 billion company operates in the Oil & Gas Equipment & Services industry (Canada and the U.S.). CEU provides consumable chemical solutions to energy players in North America. It boasts a vertically integrated consumables business model and decentralized operations in attractive markets.

CES is present in all major basins in the U.S., including Bakken, Eagleford, Permian, Eagleford, Bakken, Marcellus and Scoop/Stack. In the Western Canadian Sedimentary Basin, it operates in major resource plays such as Montney, Duvernay, Deep Basin and SAGD. The company has a main chemical manufacturing and reacting facility in Kansas and nine lab facilities across North America.

Record revenue

In the three months ending March 31, 2024, total revenue increased 6% year over year to a record $588.6 million. Net income climbed 65% to $54.45 million compared to Q1 2023. CEU returned $23.7 million to shareholders through share repurchases ($17.8 million) and dividends ($5.9 million).

Cash flow from operations during the quarter increased 17.9% to $86.3 million, while free cash flow (FCF) soared 277.6% to $57.4 million from a year ago. CEU’s net income has consistently risen every year since 2021.

Management said the record quarterly results indicate the unique resilience, cash flow generation, and profitability characteristics of CEU’s capex-light, asset-light, consumable chemicals business model.

Well-positioned for growth

CEU Energy is confident that it can continue generating strong surplus FCF in the coming quarters. Its centralized business model is a competitive advantage and foundation for business growth. Its basic chemical manufacturing product lines (drilling fluids, completion and production chemicals) are industry essentials.

More importantly, CEU caters to a quality customer base (82% public and 18% private). The asset-light business model accelerates revenue growth, especially the recurring production chemical revenue stream, and generates significant free cash flow through all cycle points.

Investments in research and development of new technologies and hiring top-end scientific talent that can develop and refine these technologies are ongoing concerns.

Market outlook

CES Energy is optimistic about the rest of the year. The company expects stable upstream activity, increased service intensity levels, and strong commodity prices in North America. With the impending bull market due to the recent interest rate cut, the stock could deliver far superior returns to TFSA investors in 2024 and beyond.

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.

More on Dividend Stocks

Technology
Dividend Stocks

10 Years From Now, You’ll Be Glad You Bought These Magnificent TSX Dividend Stocks

The TSX is lucrative to buy these magnificent dividend stocks in bulk and be proud of this decision 10 years…

Read more »

calculate and analyze stock
Dividend Stocks

4 Fabulous Dividend Stocks to Buy in July

Are you looking for long-term income? These four dividend stocks should not only provide you with value in July but…

Read more »

financial freedom sign
Dividend Stocks

5 Steps to Financial Freedom for Canadian Millennials

Follow these steps and nothing can stop Canadian millennials from achieving their early retirement dreams.

Read more »

Investor wonders if it's safe to buy stocks now
Dividend Stocks

We’re Only Getting Older: A Top TSX Stock That Benefits From an Aging Population

For a bet on the aging population, consider this small-cap stock with growth potential.

Read more »

Growing plant shoots on coins
Dividend Stocks

Yield Today, Growth Tomorrow: 3 Stocks to Keep Building Your Wealth

For investors seeking yield today and growth tomorrow, these top Canadian dividend stocks are certainly worth considering right now.

Read more »

Payday ringed on a calendar
Dividend Stocks

This 10.72% Dividend Stock Pays Cash Every Month

This dividend stock remains a consistent, defensive dividend producer that will give up over 10% in income each and every…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA Investors: 2 Standout Domestic Stocks With 7% Yields

These top dividend-growth stocks look oversold.

Read more »

Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Despite their recent declines, the long-term growth outlook of these two top dividend stocks remains strong, which could help their…

Read more »