More than two years ago, the Bank of Canada (BoC) was forced to increase interest rates from 0.25% in 2022 to 5% in 2023 as inflation soared to multi-year highs. Its quantitative tightening policy seemed to have worked, as inflation has cooled down, allowing the regulator to begin slashing interest rates this year.
Since June, the BoC has reduced interest rates three times, and they are now 75 basis points lower at 4.25%. The central bank emphasized that housing prices continue to exert upward pressure on inflation and might remain a near-term headwind for the economy.
Canada’s annual inflation rate in July fell to 2.5%, lower than 2.7% in June. In fact, it was the lowest reading since March 2021, when inflation reared its ugly head.
While interest rates have fallen, they are still higher than the 1.75% before the COVID-19 pandemic. If inflation declines further, investors should expect additional rate cuts in the next 12 months, making stocks such as Waste Connections (TSX:WCN) and Slate Grocery REIT (TSX:SGR.UN) top investment options right now.
The bull case for Waste Connections stock
Valued at $65 billion by market cap, Waste Connections provides non-hazardous waste collection, transfer, disposal, and resource recovery services in the U.S. and Canada. It offers collection services to residential, commercial, municipal, industrial, and exploration and production customers. The company also offers landfill disposal and recycling services.
Despite its massive size, Waste Connections continues to grow at a steady pace, increasing sales from US$5.38 billion in 2019 to US$8.4 billion in the last 12 months. Meanwhile, its long-term debt rose from US$4.4 billion to US$7.7 billion during this period.
In the last four quarters, Waste Connections’s free cash flow has risen to US$1.28 billion, up from US$875 million in 2019. Comparatively, its interest expenses totalled $200 million in the last year. We can see that Waste Connections generates enough cash to service its interest payouts. A lower interest rate environment should help increase cash flow and earnings further.
Waste Connections stock might seem expensive at 33.5 times forward earnings. However, it is forecast to expand adjusted earnings by 19% annually in the next five years.
The bull case for Slate Grocery stock
Slate Grocery is among the largest real estate investment trusts in Canada and the United States. It owns and operates US$1.3 billion of critical real estate infrastructure in the United States. Its grocery-anchored portfolio and strong credit tenants have allowed Slate Grocery to increase revenue by 23.5% annually in the last ten years. Meanwhile, its adjusted earnings have expanded at a compound annual growth rate of 26% in the past decade.
The real estate investment trust giant explained that its average in-place rent of US$12.56 per square foot is significantly below the market average of US$23.38, providing the company with enough room to benefit from future rent increases and higher net operating income.
Slate Grocery reported revenue of US$209 million and an operating income of US$128.4 million in the last 12 months. Comparatively, its interest expenses totalled US$55.6 million, while free cash flow was US$71 million. Slate Grocery also pays shareholders an annual dividend of US$1.17 per share, translating to a forward yield of 8.7%.
Interest rate cuts since June have already driven Slate Grocery stock higher by 23% in the last three months.
