When interest rates continue to fall, finding growth stocks with the right business models to take advantage of this shifting macro environment is important. Lately, we’ve seen a rotation build from large-cap stocks to smaller companies that may be more interest rate sensitive. But it’s also true that some large-cap companies may have greater upside as a result of declining interest rates.
These two stocks certainly fit into this bucket. Let’s dive into why these two large-cap Canadian stocks may be worth considering right now as the Bank of Canada continues to cut rates.
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TD Bank
Toronto-Dominion Bank (TSX:TD) is one of the largest banks in Canada, with more than 27.5 million customers globally. The bank operates in four segments: Canadian personal and commercial banking, US retail banking, wholesale banking, and wealth management and insurance.
TD Bank had approximately CA$1.9 trillion in assets in 2023, and has positioned itself as one of the world’s leading online financial services firms. On May 22, 2024, Toronto-Dominion Bank released its financial reports for the second quarter of fiscal year 2024. The report highlighted that its reported diluted earnings per share was $1.35, and adjusted diluted earnings per share came in at $2.04.
Many investors, myself included, look at declining interest rates as a key tailwind for the bank. As the cost of borrowing short is reduced, and the benefits of lending long improves, this is a bank which could see outsized profitability over the long term. In addition to the company’s productivity push and other measures, which have already had a positive outcome on these factors, there’s a lot to like about TD stock right now.
Shopify
Shopify (TSX:SHOP) is one of the leading global e-commerce companies that provides a platform for small- and medium-scale businesses to sell their products and services. Operating in more than 175 countries, Shopify Inc. offers reliable, customized, secured and speedy services to online customers through its platform.
In the first quarter of 2024, Shopify reported an increase of 23% in its gross merchandise volume, amounting to US$60.4 billion. In addition, the company also reported a revenue increase of 23%, amounting to US$1.9 billion. Shopify’s gross margin during the quarter was 51.4%, a rise from the previous year’s first quarter of 47.5%.
From a valuation perspective, higher-growth companies like Shopify benefit from lower interest rates. That’s because valuation multiples for higher-growth stocks which have yet to reach their full potential tend to expand in such environments. Indeed, we all saw where Shopify was trading following the pandemic. A return toward near-zero interest rates would certainly be a positive for this company.
In addition to re-accelerating growth, there’s a lot to like about how Shopify is positioned to take advantage of this new lower-rate environment.
