One often looks to build a portfolio of stocks that can beat the market. Some stocks outperform, and some underperform. In 2024, the TSX Composite Index rallied 18%, with a 15% rally in the second half. Energy and real estate stocks rallied, while telecom and automotive sectors underperformed.
The underperformers of 2024
Multiple factors are involved in stock price movement. Macro factors like the overall liquidity in the market, investor confidence, government policies, and business environment can drive even a weak stock upwards. However, fundamentals play a primary role when the macro environment is tough. The telecom and automotive sectors faced industry-specific headwinds.
BCE stock
BCE (TSX:BCE) stock fell 34% in 2024, underperforming the market’s 18% rally. While the beginning of interest rate cuts in July 2024 revived the stock by 12%, it returned to the downtrend as the company paused its dividend growth for 2025 and reported weak third-quarter earnings due to a one-time $2.1 billion non-cash impairment of media assets. This expense pulled BCE into a quarterly net loss of $1.2 billion.
BCE is in the middle of a company-wide restructuring, and more such one-off expenses are likely to come. It is selling low-margin, highly regulated businesses and buying high-margin-less regulated businesses, such as cloud, networking, business solutions, and cyber security.
This restructuring comes after a tussle with the telecom regulator, which asked BCE to share its fibre network with competitors. This rule has discouraged big telcos, including BCE and Telus Corporation, from investing billions in fibre networks as they lose their exclusive rights. The two have significant debt on their balance sheet, which was never an issue because the network generated high income to pay off the debt and earn strong cash flows for the telcos.
Adapting to the new regulatory environment, BCE has significantly reduced its capital expenditure and is looking to reduce its debt by selling non-core assets. It is also building new revenue streams. However, this transition could take some time. For 2025, it expects revenue growth of -3% to 1% and earnings per share (EPS) to fall by 8–13%. However, lower capex and debt could increase its free cash flow by 11–19% in 2025 and reduce its dividend payout ratio to 104% from 125% in 2024.
BCE stock could revive and return to dividend growth in the next two to three years once it adjusts to the new regulatory environment.
Magna International stock
Magna International (TSX:MG) stock fell 23% in 2024 as high interest rates kept automotive demand weak. The stock did see a 23% recovery rally between September and early December 2024 as interest rate cuts revived hopes. However, elections in major markets and policy changes affected the demand for cars.
On one side, the U.S. and the E.U. are in a tariff war with China. This has affected electric vehicle (EV) imports from China and luxury internal combustion engine (ICE) vehicle imports from the West. On the other side, U.S. President Donald Trump has cancelled EV subsidies and is imposing tariffs on imports from Canada and Mexico. The automotive market flourishes in a free trade environment as components trade multiple times before they are assembled and delivered.
The macro environment is not conducive to the automotive market, making it difficult for Magna to give any guidance. The company is currently preserving its cash and adopting a wait-and-watch approach till the policy changes settle. More downside is likely as the market reacts to these changes.
However, Magna would benefit from a recovery in automotive demand and seeing its stock price rebound. That rebound could take years. Until then, Magna’s strong balance sheet can help the company withstand demand weakness and pay dividends. You could consider buying this stock for its 5% dividend yield and a cyclical recovery whenever that comes. When the tables turn, Magna’s stock could double and cross the $100 mark. However, that will be the right time to book profits, given the cyclical nature of the sector.
Investor takeaway
The strong fundamentals of the above stocks could revive their stock price when the headwinds subside. These underperformers could become the outperformers of tomorrow.
