When it comes to finding TSX stocks to buy for the long haul, it goes without saying that the best opportunities come not just from finding the highest-quality companies but from buying those stocks after they’ve sold off for more than they should have.
When you find a stock with a solid core business and years of growth potential and then buy it below value, you significantly increase the long-term returns that investment can generate.
However, as advantageous as it is to find high-quality stocks that are trading cheaply, that doesn’t mean you can just buy anything that’s down.
In fact, that’s where a lot of investors go wrong. Just because a stock looks cheap doesn’t mean that it’s undervalued. You still need to make sure the underlying business is strong, the balance sheet is solid, and the long-term outlook is intact.
When you can find a high-quality company that’s temporarily out of favour, though, those are often where the best opportunities come from. Because the reality is, by the time everything about a stock looks perfect again, the share price has usually already recovered.
So, if you can identify catalysts ahead of time and be willing to act before sentiment improves, that’s where you can generate the best returns. On top of that, if the stock also offers a compelling dividend, you’re essentially getting paid to wait for that recovery to play out.
And in today’s market, while there aren’t a tonne of stocks that look extremely cheap, one of the best oversold opportunities right now has to be Canadian Apartment Properties REIT (TSX:CAR.UN).
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Why CAPREIT is one of the most oversold stocks on the TSX
In the current environment, it’s no secret that there aren’t a tonne of truly oversold stocks on the TSX to buy and hold for the long haul. However, with that said, one sector that has clearly lagged is real estate, especially residential REITs like CAPREIT.
CAPREIT, the largest publicly traded residential REIT in Canada, has seen its stock drift lower over the last couple of years. However, the decline in valuation is not necessarily because the business has deteriorated significantly, but rather largely due to macro headwinds.
Higher interest rates have been the biggest factor, increasing borrowing costs and putting pressure on valuations across the entire REIT sector.
On top of that, though, concerns around slowing immigration, more housing supply coming online, and expectations for lower rent growth have also weighed on sentiment.
But when you actually look at the business, the fundamentals haven’t changed nearly as much as the stock price would suggest.
For example, occupancy continues to remain strong, cash flow is stable, and demand for rental housing is still resilient.
Yet despite that, the TSX stock now trades at a much more attractive valuation, roughly around 13 times its forward funds from operations (FFO) and about 16 times its forward adjusted funds from operations (AFFO), all while offering a yield in the range of 4.5%, showing why it’s one of the best to buy now.
To put that into perspective, over the last decade, CAPREIT averaged a forward price-to-FFO ratio of 19.8 times and a forward price-to-AFFO of 23.5 times. Furthermore, it averaged a forward yield of just 3.2% over that stretch.
So, as expectations and sentiment have shifted, CAPREIT’s stock has become incredibly cheap. And that’s exactly what creates such a significant opportunity for investors.
Why the REIT is poised for a comeback
Looking ahead, CAPREIT doesn’t necessarily need to go back to being a high-growth story to generate strong returns. In fact, most of the upside from here will likely come from a shift in sentiment and capital flows.
Not only have interest rates already peaked, but as inflation continues to cool off, they should continue to decline. And when that happens, REITs are typically one of the first sectors to benefit.
Even if rates don’t come down immediately, though, the current environment is already becoming more supportive for defensive, income-generating assets.
With macro uncertainty rising, investors tend to rotate toward more stable businesses that can generate consistent cash flow. And residential REITs like CAPREIT are some of the best TSX stocks to buy for that reliability.
So, while one of the best residential real estate stocks on the TSX continues to trade at valuations we haven’t seen in over a decade, there’s no question it’s one of the best oversold stocks to buy before it rebounds.
