Donald Trump’s tariff war on some of America’s closest allies (including Canada) is creating chaos for many TSX stocks. Undoubtedly, it is hard to predict what will happen tomorrow, not to mention what will happen a week or a month from now.
The volatility has created both hazards and opportunities. If you are wondering how to react, here are two TSX stocks to buy on the dips and two to sell (or just avoid at the moment).
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Buy: A global software player
Constellation Software (TSX: CSU) operates nearly 1,000 small, niche software businesses around the world. If you are worried about a trade war, this is a stock to hold.
Its businesses provide essential, mainstay technology for their customers. The software conglomerate is exposed to a wide mix of sectors, industries, customers, countries, and regions. This diversification provides a natural hedge in case the economy weakens in any one region.
Over the long term, the company can operate counter cyclically. When the economy is strong, it can raise prices and focus on sales.
When the economy weakens, Constellation can opportunistically buy more software businesses on the cheap. For both defence and growth, this is one of the best TSX stocks in Canada.
Buy: A top TSX grocery stock
Loblaws (TSX: L) is another TSX stock to own if you are worried about a trade war. The company has a great mix of grocery store options that span across the economic spectrum. Inflation and a tough economy have favoured this stock. Its stock is up 165% over the past five years.
Loblaws has the capacity to quickly adjust prices to contemplate potential tariffs. Given its large operations across Canada, it has the scale to help enforce attractive discounts and deals from suppliers. Its points-for-groceries rewards program helps keep a loyal customer base returning, despite price increases.
While the public may not love this company, most Canadians are still walking through its doors on a regular basis. It is a very well managed business and a defensive play if you think there will be more volatility to come.
Avoid: A cheap recreational company
If you want to avoid any potential downside from a trade war, you probably want to avoid a stock like BRP (TSX: DOO). While this company has a past record of being a strong compounder, it has been facing a plethora of challenges in the past few years.
The pandemic created a surge in demand for its recreational vehicles and boats. However, that demand has declined as quickly as it rose. BRP has had to clear out inventory and discount old stock. Likewise, the entire power sports segment has become increasingly competitive.
BRP manufactures in Canada and Mexico. A tariff war would create a massive burden over its cost base. While this stock is very cheap, now is not the time to own a stock like this.
Avoid: A cheap TSX auto part stock
Another stock I wouldn’t touch is Magna International (TSX: MG). Auto parts need to cross the border several times in their construction. If there are tariffs, it will create a compounding cost effect as the parts cross the border several times. That could lead to costs rapidly rising.
Many analysts don’t believe Magna and other auto part makers will be able to pass all the costs to their customers. At some point, vehicle costs will rise so high that demand will simply wane. Unfortunately, that will impact auto OEMs and suppliers.
Magna has already faced challenges in its business. This additional issue won’t make things any easier. Consequently, this is one TSX stock I wouldn’t touch no matter how cheap it gets.
