Invest $500 and Unlock Big Gains With This Top Canadian Stock

Here’s an undervalued top Canadian stock that could unlock substantial gains over the next few years.

Kay Ng

Author Bio Kay graduated from the University of British Columbia with a Bachelor of Science in Computer Science and furthered her studies in financial markets, finance, and financial accounting. She began investing in dividend stocks in 2008, turning an early interest into a lasting passion. Over the years, Kay has refined her investment approach to focus on high-quality businesses, using fundamental analysis and valuation to identify long-term investment opportunities. Her investment research and articles have been featured in The Motley Fool, Sure Dividend, and Seeking Alpha. Outside of investing, Kay enjoys playing the piano, from popular songs learned by ear to challenging classical compositions. Her favourites include Fantaisie-Impromptu by Frédéric Chopin and La Campanella by Franz Liszt. Education Bachelor of Science (BSc) in Computer Science, University of British Columbia Further studies in financial markets, finance, and financial accounting Areas of Expertise Dividend stocks, fundamental analysis, company valuation, quality investing, long-term investing, business fundamentals, and identifying investment opportunities in high-quality companies. Social Media Profiles LinkedIn Favorite Investment Quotes “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” — Benjamin Graham “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett

Published September 29, 2024 10:00 am EDT

Investing wisely is essential. Here’s one golden rule: never put all your money into a single investment. This strategy reduces risk and helps safeguard your capital. While some stocks may seem like golden opportunities, they can also be highly volatile, and in the worst-case scenario, stock prices can plummet to zero. Diversification is key — spreading your investments across multiple promising assets in a diversified portfolio can significantly enhance your chances of achieving solid returns over time.

If you’re ready to invest $500, consider a top Canadian stock with the potential to unlock significant gains in the future: Linamar (TSX: LNR).

Linamar: A legacy of innovation

Founded in 1966, Linamar has built a strong reputation in advanced manufacturing and product development. With its roots in Guelph, Ontario, the company operates approximately 75 manufacturing facilities worldwide and boasts 17 research and development centres dedicated to innovation. This commitment to cutting-edge technology and manufacturing expertise positions Linamar as an important player in the consumer discretionary sector. However, this sector is sensitive to economic cycles.

In recent years, Linamar has strategically diversified beyond its traditional auto parts business, venturing into infrastructure and agricultural equipment manufacturing. This shift has been facilitated by a series of strategic acquisitions that have expanded its market presence and revenue streams.

Since 2017, this diversification strategy has driven impressive revenue growth, with revenue per share increasing at over 8% annually. However, the transition has not been without challenges, and the company has faced fluctuations due to economic cycles, resulting in a diluted earnings per share (EPS) compound annual growth rate (CAGR) of only about 0.3%.

Resilience through economic fluctuations

Linamar’s ability to weather economic downturns is reflected in its dividend policy. Because of the inherent risks of its industry, Linamar maintains a low payout ratio, which has allowed it to increase dividends at a remarkable CAGR of around 11%.

Notably, though, the company faced challenges during the COVID-19 pandemic, leading to a dividend cut of 50% in May 2020. However, as profits rebounded, Linamar promptly reinstated its dividend by November 2020. With an estimated payout ratio of just 10% of adjusted earnings this year, its dividend should be well-protected.

Today, Linamar is poised to address key global trends, including rapid technological evolution, environmental sustainability, urbanization, and the demands of an aging and growing global population. Its core business areas — mobility, industrial applications, and medical technology — position it well to capitalize on these trends. Investments in electrification within the auto parts sector, coupled with a focus on agricultural and medical equipment, demonstrate Linamar’s commitment to innovation and growth.

A valuation worth considering

The latest quarterly results provide a promising outlook, with Linamar reporting a remarkable 12% increase in revenue and a 17% jump in normalized EPS for the second quarter. At a current share price of $63.83, the stock appears undervalued, trading at a price-to-earnings ratio of approximately 6.5 based on adjusted earnings. Linamar stock could trade at a multiple closer to nine, suggesting significant upside potential.

Analysts are optimistic about Linamar’s future, with a consensus 12-month price target indicating potential gains of 31% to 39%. Based on the lower end of that range, a $500 investment could grow to approximately $655, making it an enticing option for investors. Moreover, the stock’s dividend yield of under 1.6% can be viewed as a bonus, enhancing the overall appeal of this investment.

The Foolish investor takeaway

If you’re looking for a top Canadian stock to invest $500 in, Linamar presents a compelling opportunity. With its solid foundation, diversification strategy, and promising growth potential, it could be the key to unlocking significant gains in your investment portfolio.