Beating the TSX Index has become a whole lot more challenging, with the Canadian market heading into overdrive, outpacing even the S&P 500 in the past year. Indeed, it may come as a bit of a shocker to see the financial- and energy-heavy TSX Index topping the S&P 500 last year, especially when you consider how much excitement there is surrounding agentic AI and, perhaps soon, physical AI.
And when you consider the amount of heat that’s surrounding the semiconductor names (AI chips can’t seem to lose these days!), perhaps it’s time to start taking a small step back to consider where the relative value might lie in a market where you’re bound to pay a big, fat premium on quality. Of course, Canadian investors should stay invested in U.S. stocks.
After all, it’s most exposed to the AI boom, as corporate America looks to adopt and embrace the technology while setting some realistic milestones in place for AI-induced savings and all the sort.
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The TSX Index is flexing its muscles, but there’s still so much value out there
In short, AI is going to be put to work, and while I do think there will be many winners, especially within U.S. tech, in the next three to five years, I also think that investors are going to be paying quite a bit of a premium, especially when it comes to the most euphoric and exciting of AI plays.
If you’re looking to get in on the AI chip excitement, you had better prepare for risk and volatility, as that is the price you’ll need to pay for a shot at outsized rewards in the face of a demand upswing, the magnitude of which remains largely unknown, at least for the most part.
Meanwhile, the TSX Index has been scoring those quiet wins. With hard assets, energy, and basic materials, Canada’s economy still stands to get a jolt from the AI revolution — though perhaps as more of a supporting act than a star of the show. But for value investors, this is where the risk/reward, at least in my view, looks most intriguing. Instead of maxing out your risk profile for reward, perhaps looking for a slight asymmetry between risk and reward is the way to go.
Enbridge and TC Energy look like prime buys for their dividends
Right now, I view Enbridge (TSX: ENB) and TC Energy (TSX: TRP) as absolute cash cows that aren’t as expensive as they could be, especially given their rock-solid, steady position in the midstream, which insulates them from wild swings in commodity prices. Whether it’s oil or gas, the energy producers can be quite a wild ride. However, I also view them as incredibly cheap for dividend investors seeking solid growth over time for a fair price.
In any case, Canadians may have numerous reasons to give the pipelines a second look, especially as a big surge in cash flows looms. Much of that cash is going back to investors in the form of dividend hikes. Reinvestment and generous raises could become the new normal, especially as energy demand calls for increased investment to modernize the means of transporting energy in this new era.
Whether it’s AI’s power-hungry or the ongoing blockage in the Strait of Hormuz, the energy sector seems to be in a good spot right now. And the pipelines, like Enbridge and TC Energy, seem like relative bargains that are swimming in free cash flow. TC Energy is pricier at 28.4 times trailing price to earnings (P/E) with a 3.86% yield, while Enbridge goes for 25.3 times trailing P/E with a generous 5.2% yield. I think both are great buys together right here. I think they’ll play a large role in helping the TSX have another great year.
