The TSX Composite Index gathered momentum from mid-June when interest rate cuts began in Canada. Real estate and tech stocks were the first to recover as they were the hardest hit by interest rates. While many stocks have recovered, some underrated Canadian stocks are trading at a discount. The recovery will take time to reach them as they depend on consumer spending for growth. Until there are signs of an increase in consumer spending, their rally will remain subdued.
Underrated Canadian stocks to buy before the rally
If you have the patience to wait for the rally, here are two underrated stocks you can buy in the current dip.
Magna stock
Magna International (TSX:MG) stock has tested investors’ patience since the last U.S. presidential elections. The stock price that rallied past $100 on Joe Biden’s push to electric vehicles has been grappling with challenges beyond its control. The global automotive market is mixed, with many European automakers and battery makers downsizing their operations on weak demand. Magna only provides components for light passenger vehicles and relies heavily on General Motors, BMW, Stellantis, Daimler, Ford, and Volkswagen for revenue. Fisker even declared bankruptcy, and Magna had to write off losses on its operations for the automaker.
Magna has revised its 2024 revenue outlook downwards from $42.6–$44.2 billion to $42.5–$44.1 billion as its client base of Tier 1 automakers and original equipment manufacturers (OEMs) slow production.
| Magna’s fundamentals | 2020 | 2021 | 2022 | 2023 | H1 2024 |
| Sales (US$ Billions) | 32.647 | 36.242 | 37.84 | 42.797 | 21.928 |
| YoY Growth | 11.0% | 4.4% | 13.1% | ||
| EPS (US$) | 2.52 | 5 | 2.03 | 4.23 | 1.12 |
| YoY Growth | 98.4% | -59.4% | 108.4% | -73.5% |
Magna’s stock has fallen prey to its optimistic outlook. Sales grew double-digit in two out of the last three years. Even the revised revenue outlook shows sales growth of 0–3%. However, the stock trades at 0.29 times its sales per share, below its September 2023 ratio of 0.38 times. This shows that the market has priced in a dip in sales.
With interest rates easing, consumers will have some financial flexibility in a year or two. Once the economy normalizes, automotive sales could pick up. And when that happens, Magna stock could rally at an accelerated rate. Until then, the company can sustain profits with a robust balance sheet and optimized costs. It could also continue to give an annual dividend of 4.2% in the meantime.
Telus stock
Telus Corporation (TSX:T) stock has been in a downtrend since the interest rate hike began. It is not just the interest rates but also the weakness in the telecom sector due to regulatory uncertainty and price competition that has been putting downward pressure on the stock. Nevertheless, the company’s long-term growth prospects are bright as the telco will gradually reduce its debt and bring it in line with its target. Moreover, the 5G infrastructure will open several new revenue streams for Telus Corporation.
The stock is still trading at a 34% discount and is due to announce its next year’s dividends in early January. If the company sustains its 3.5% semi-annual growth, the stock could see growth. And improvement in fundamentals could drive the stock price. T is trading at a forward price-to-earnings (PE) ratio of 21.7 times, below last year’s June ratio of 24.7 times.
The bottom line
Now is a good time to buy the two stocks while they trade at lower valuations. A little patience can reap significant rewards as these stocks could grow rapidly when they pick up momentum.
