Abraham Lincoln’s quote, “Give me six hours to chop down a tree, and I will spend the first four sharpening the axe,” is a perfect way to describe an undervalued stock.
Most companies spend a long time preparing the groundwork so that when opportunity strikes, they make the most of it. It takes a keen investor with a futuristic vision to realize if the company’s axe is sharp or not. They invest in such stocks while companies are sharpening the axe. When the time comes, these stocks will bloom and make up for the years of slow growth with a big fat share price rally in a few years.
The Tax-Free Savings Account (TFSA) is an apt tool to buy undervalued growth stocks that can beat the market and help you build generational wealth.
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Two undervalued stocks for your TFSA investment
For 2025, the TFSA contribution room is $7,000, which you can allocate between the below two undervalued stocks.
Advanced Micro Devices
Advanced Micro Devices (NASDAQ:AMD) stock has dipped 18% from its August peak of $186.65, even after U.S. president Donald Trump relaxed trade restrictions on China. In the second quarter, AMD’s gross margin fell to 43% instead of 54% because of the US$800 million inventory of Instinct MI308 products, which was bound for exports.
In August, Trump allowed AMD to sell data centre chips to China and share 15% of that revenue with the U.S. government. This announcement should have boosted the stock, but it didn’t. This time, China’s enthusiasm for the ban lift was cold.
The trade war has discounted AMD stock, and investors have not priced in the artificial intelligence (AI) growth potential. AMD was a late entry in the AI data centre space. But it never intended to beat Nvidia. AMD’s strategy has been to enter a well-established market, give consumers a cost-efficient alternative, and reduce the performance gap.
Once AMD’s high-margin AI data centre chips see a demand boost, its earnings per share could rise triple digits. The stock is trading at a forward price-to-earnings (P/E) ratio of 26.7, which is below Nvidia’s and Broadcom’s ratios of 39.7 and 39, respectively. Both companies are riding the AI data centre rally. It is a good time to buy AMD while the market undervalues its AI full-stack opportunity.
You can buy U.S. stocks in a TFSA and enjoy the tax-free withdrawal of capital appreciation, which makes AMD a good TFSA investment. Avoid buying U.S. dividend stocks, as the dividend is subject to withholding tax.
Constellation Software stock
Constellation Software (TSX:CSU) stock is trading at a sweet spot of its 2025 dip of above $4,300. This resilient software holding company has had a flat year so far, with all rallies reversing. Behind the tepid performance is economic uncertainty that has delayed technology investments by businesses.
However, Constellation continues to buy software companies and grow its cash flow through acquisitions. The stock’s enterprise value to sales of 6.5 is the lowest in five quarters. As uncertainty clears and economic growth recovers, the companies acquired by Constellation may see an uptick in value. The foreign exchange losses will reduce, and the portfolio value will increase.
It is difficult to say when the recovery will begin, but this presents an opportunity to accumulate Constellation stock at every dip and hold it for the long term.
