The 2 Best TSX Stocks to Buy Before a Recovery Takes Hold

These TSX stocks have highly defensive operations and trade ultra-cheaply, making them two of the best to buy before a recovery.

Daniel Da Costa

Author Bio Daniel joined The Motley Fool Canada in 2019 and brings experience in banking, investing, and financial analysis. Growing up as the son of a proprietary stock trader and educator, he developed an early interest in financial markets and a passion for helping Canadians improve their financial well-being. His work spans investment research, economic analysis, and econometric modelling, with a focus on understanding the broader forces that influence businesses, markets, and the economy. As an investor, Daniel looks for high-quality businesses with long-term growth potential, reliable income, and attractive valuations. Outside of finance, Daniel enjoys spending time with his family, playing hockey, running, and sailing. Areas of Expertise Investment research, economic analysis, econometric modelling, banking, financial analysis, business fundamentals, long-term investing, dividend investing, and company valuation. Favorite Investment Quote "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." — Warren Buffett

Published June 22, 8:45 pm EDT

It’s no secret that markets have been anything but calm lately. Between interest rate uncertainty, slowing economic growth expectations, and ongoing geopolitical concerns, it seems like there are a bunch of reasons to be cautious before deciding to buy TSX stocks in this environment.

However, periods like these often create some of the best opportunities to buy high-quality businesses before sentiment improves.

After all, investors rarely get the chance to buy great companies when everything looks perfect because stocks can quickly become overvalued in strong market rallies.

That’s why some of the best returns often come from identifying strong businesses while uncertainty is still weighing on their share prices.

And right now, two of the best stocks on the TSX to buy before they recover and while they continue to trade cheaply are GFL Environmental (TSX: GFL) and Canadian Apartment Properties REIT (TSX: CAR.UN).

One of the best defensive growth stocks to buy on the TSX

If you’re looking for a stock that’s incredibly defensive yet continues to find ways to grow and expand its operations, GFL Environmental is one of the best TSX stocks you can buy.

And while the stock continues to execute well operationally, the share price has been impacted, giving long-term investors a significant opportunity to buy today.

In fact, GFL is currently trading around $49 per share, well below its 52-week high of more than $70 due to worries about its growing debt load and some of its most recent acquisitions.

Investors have worried about several factors, including the significant equity issuance required to fund the deal, the company’s already elevated debt levels, and uncertainty surrounding regulatory approvals.

What investors may be overlooking, though, is how strong the underlying business remains.

Waste management is one of the most defensive industries in the economy, which creates recurring revenue, strong pricing power, and highly predictable cash flow, making GFL incredibly reliable over the long haul. In addition, GFL has been a growth-by-acquisition stock for years, buying up businesses that it can fold into its operations and immediately find synergies and cost savings.

Therefore, while the impact is meaningful in the short term, it’s hard to justify the stock being worth more than 25% less than it was just a year ago. In fact, its forward enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio is now just 11.4 times, much cheaper than its five-year average of 13.3 times.

So, if you’re looking for the best TSX stocks to buy before they recover, GFL looks like a classic case of a high-quality business trading at a temporary discount due to short-term execution concerns.

A high-quality REIT still trading below its potential

In addition to GFL, Canadian Apartment Properties is another one of the best TSX stocks to buy before it recovers, yet it’s trading cheaply for a different set of reasons.

Over the last few years, higher interest rates have weighed heavily on REIT valuations across the board. At the same time, concerns about slower immigration growth have led some investors to question the long-term outlook for rental demand in Canada.

As a result, many investors have become increasingly pessimistic toward residential real estate, and CAPREIT stock has yet to recover fully.

That means that investors still have the chance to buy one of the best and largest landlords in Canada at a compelling valuation. That’s ideal because CAPREIT isn’t just a reliable and defensive business. It’s one of the easiest ways to gain exposure to the Canadian real estate sector.

Right now, CAPREIT trades at a forward price-to-adjusted funds from operations (P/AFFO) ratio of just 15.8 times. That’s significantly cheaper than both its 5- and 10-year averages of 21.8 and 23.4 times, respectively.

Furthermore, its dividend yield now sits at roughly 4.5%, which is considerably higher than it has offered in the past. In fact, its 5- and 10-year average forward yields were just 3.3% and 3.2%, respectively.

So, if you’re looking for some of the best TSX stocks to buy undervalued before they start to recover, CAPREIT is undoubtedly one of the top long-term investments to consider right now.