There’s no question that there’s been a significant divergence in stocks on the TSX in recent months. Some companies have been performing extremely well, while others continue to trade cheaply. However, with interest rates widely expected to continue declining, many of these discounts won’t last much longer. So, if you’re looking for high-quality growth stocks to buy, right now is one of the best opportunities to take advantage.
Why now is the time to buy high-quality growth stocks?
Lower interest rates typically drive the price of growth stocks higher because they reduce the cost of borrowing, which generally leads to an improvement in profitability for most businesses and, in turn, makes future earnings more attractive to investors.
In addition, many growth stocks often rely on borrowing to fund the expansion of their operations.
Therefore, when interest rates are high, debt is more expensive, limiting how quickly or aggressively these companies can grow. However, as interest rates begin to decline, borrowing becomes cheaper, allowing businesses to invest more in growth initiatives without significantly impacting their bottom line.
In addition to the microeconomic impact it has on individual companies, lower interest rates also impact how growth stocks are valued.
Typically, growth stocks trade based on their future earnings potential. Therefore, when interest rates are high, investors discount those future earnings more heavily, making the growth stocks cheaper and making it an ideal time for long-term investors to buy.
However, when interest rates decline, the discount shrinks, making those same future earnings look more valuable today, which pushes stock prices higher.
It’s also worth noting that lower interest rates tend to push investors out of fixed-income assets like bonds and into riskier assets like stocks, adding more demand to the market. Combine that with improving business conditions, and growth stocks often see some of the biggest gains when rates start dropping.
So, if you’ve got cash on the sidelines that you’re looking to invest, here are two of the best and most undervalued growth stocks to buy now.
Two no-brainer companies to buy right now
If you’re looking for two of the best Canadian stocks to buy right now that have both significant long-term growth potential yet also trade at the bottom of their 52-week ranges, InterRent REIT (TSX:IIP.UN) and Alimentation Couche-Tard (TSX:ATD), are among the best.
Currently, InterRent trades nearly 33% off its 52-week high, which is a significant discount for a top residential REIT that has repeatedly proven how well it can grow shareholder value.
For years, InterRent has done an incredible job acquiring new apartment properties for its portfolio and investing in upgrading its older units in order to increase the rental revenue it generates rapidly.
Therefore, while it trades off its highs like many of its peers, in large part due to higher interest rates, it’s easily one of the best growth stocks to buy right now.
Not only have its operations hardly been impacted, with revenue still estimated by analysts to grow over the coming years, but in addition, it currently trades at a forward price-to-funds-from-operations (P/FFO) ratio of just 15.2 times, which is significantly below its five and 10-year averages of 24.2 and 22.5 times, respectively.
Meanwhile, despite being one of the top long-term growth stocks to buy for years now, Alimentation Couche-Tard is also trading at the bottom of its 52-week range and nearly 20% off its 52-week high.
For years Couche-Tard, an owner of gas stations and convenience stores, has been one of the best and most consistent growth stocks you could buy. It’s grown both by acquisition and organically, rapidly increasing its sales and scaling its costs to increase profitability.
In fact, the stock more than doubled its revenue from roughly $34 billion in 2016 to just shy of $70 billion in 2023, which is rapid growth for such a large company.
More importantly, though, over that stretch, it increased its net income from just $1.19 billion to $3.15 billion, a jump of 165% in just seven short years.
Therefore, while one of the best and most reliable growth stocks on the TSX trades so cheaply, it’s certainly a no-brainer stock to buy right now.
