The U.S. Fed kept the interest rate unchanged and hinted at only one rate cut in 2024 compared to three expected at the start of the year. These tight monetary policy initiatives reversed the gains the Bank of Canada’s interest rate cut brought, making some TSX stocks too cheap to ignore. The two-year downtrend has made many investors question if buying the dip is putting themselves in a pit.
How to identify cheap stocks that could get expensive in future
When the market is in a downtrend, look for companies whose secular trend is intact and can withstand the crisis. If the company has sufficient cash flow to meet its debt obligation, sustain operations, and is ready for a huge demand wave, consider buying the shares when they are cheap and holding them in your Tax-Free Savings Account (TFSA). A recovery rally gives 20-40% capital appreciation in a few months when the demand triggers, and in some cases, 100%. The TFSA can help you save tax on this capital gain.
Here are three cheap stocks trading at their multi-year low due to a weak economy, but their secular trend is intact.
BlackBerry stock
BlackBerry (TSX: BB) stock is trading at its all-time low of less than $3.2, with limited scope for downside now. Behind this dip is a change in management and the continued delay in the uptick of cybersecurity revenue as governments and corporations remain cautious about their technology spending. Moreover, the tight monetary policy has reduced discretionary spending. Many consumers are delaying car purchases.
Hence, BlackBerry stock fell as much as 18% within a week from the Fed’s interest rate announcement on June 12. Investors have priced the stock for a full-blown global crisis. Now, the stock has nowhere to go but up.
However, the company is operating in two fast-growing markets: endpoint security and the Internet of Things. They have secular demand in the connected 5G world.
An easing of monetary policy and a recovery in business and consumer spending will bode well for BlackBerry and help the stock price double to around $7 per share. While the upside potential is strong, it is difficult to say when the rally will occur.
In the meantime, BlackBerry is doing well to withstand the current crisis. It is restructuring its business to streamline operations and reduce costs. Even if the company decides to sell its business, its patents could attract a handsome premium. In both good and bad scenarios, investors will get better returns.
Magna
Magna International (TSX: MG) stock has dipped to a four-year low of below $60 and will continue to fall further until car sales recover. The automotive components supplier has been waiting for electric vehicle momentum for years. It did see a small phase of pent-up automotive demand getting unleashed post-pandemic, which doubled its stock price in eight months from November 2020 to June 2021.
The pent-up demand later hit a speed bump due to supply chain issues. From there began the descent, and the demand for light passenger vehicles hadn’t revived until now. However, the demand exists. Magna restructured its business during this time to reduce costs while building capacity. The components maker is ready to process large order volumes when they come. The automotive demand trigger is an indication of economic recovery.
While you wait for the trigger, you can enjoy a 4.4% annual dividend yield that will protect your investments from inflation.
BCE stock
BCE (TSX: BCE) stock slipped 5% after the Fed kept interest rate unchanged. The telco has significant debt. Hence, high interest rates have been putting downward pressure on BCE’s free cash flows. A prolonged high rate will keep the cash flow stressed. Like BlackBerry and Magna, even BCE is restructuring its business, offloading slow-growth businesses to focus on high-growth businesses of cloud, security and digital transformation.
While it is difficult to predict if BCE will announce a dividend cut or pause dividend growth, investors have priced in the possibility. Hence, the stock trades at its 10-year low and there is scope for more downside.
There is limited downside risk and a strong recovery rally for BCE in the long term.
