September brought relief to the tight financial market as the U.S. Fed announced a larger-than-usual 50 basis point cut. The rate cut sent the TSX to an all-time high, driven by energy stocks. While the market rebounds, recession fears continue to haunt the value seekers. The interest rate cuts surely bring some relief, but the overall financial situation is still tight for households. It remains to be seen how long the economy can hold.
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The stock market in September
Many analysts have been comparing the current situation with September 2008, when the Great Recession began. Even then, the market was overvalued, and the Fed was too late to cut interest rates. It took them worst-than-expected August employment numbers to cut the rate by 50 basis points. A similar trend is unfolding this year. The Silicon Valley Bank crisis, followed by several bankruptcies of U.S. lenders, all point to the direction that history might repeat itself.
J.P. Morgan has raised the probability of a U.S. recession by the end of the year to 35% from 25%. If we do avert the recession this year, it expects a 45% chance of a recession next year.
It is impossible to predict the future. We can only make patterns, identify trends, and prepare ourselves for any situation. While interest rate easing brings hope, the question is, is it too late? In such uncertainty, you can buy stocks that are already at their lows, and a recession may not bring them much harm. However, they have a higher probability of rallying if the economy recovers.
Three top TSX stocks to consider buying in September
Dye & Durham stock
Dye & Durham (TSX: DND) is a tech stock. However, a significant portion of its earnings are tied to real estate transactions, as its Unity platform helps lawyers perform property due diligence. The falling property prices and slowing momentum in real estate transactions affected its earnings. There are some company-specific challenges, like the $1 billion debt sitting on its balance sheet and disputes between the management and active shareholders. But it has the potential to recover alongside a recovery in real estate. A glimpse of this correlation was visible as the stock rallied 42% since late June when rate cuts pumped up real estate stocks.
Even now, it is not too late to buy the stock. While DND stock may fall 33% in a recession, it could jump 38–40% in a recovery.
Magna stock
Auto components supplier Magna International (TSX: MG) is a stock worth buying as it trades near its 2020 level of around $55. The stock has failed to recover to its 2021 levels as high interest rates, oil prices, and inflation have kept consumer discretionary spending low. Car company Fisker declared bankruptcy. However, Magna maintained a positive cash flow and remained profitable thanks to its diversified customer base.
Looking at the fundamentals for its ability to withstand crisis makes me bullish on Magna, as it can rebound when car sales pick up. You could consider it to be a value buy that will unlock value a year or two from now.
Telus stock
Telus Corporation (TSX: T) stock continues to trade near its pandemic low of around $22. While the rate cuts did bring a 12% recovery between July and mid-September, the recovery has been choppy as fears of a recession keep investors cautious around high-debt companies.
Telus has a $28.2 billion debt on its balance sheet. However, it has the cash flow to continue paying interest. And with interest rates falling, the burden on its cash flows will ease. So far, the company has continued growing its dividend by 7% in 2024 at the cost of inflating its dividend payout ratio to 83% from its target range of 60–75%. If things get challenging, it will pause the dividend growth for a few years and resume growth when business conditions improve.
The above stock picks might seem conservative, but they can reduce your portfolio downside and enhance your upside in this unpredictable market.
