The TSX Index has been on such an incredible bull run in the past year, with far more smoothness than the U.S. indices (most notably the S&P 500 and especially the growth-heavy Nasdaq 100). It’s hard to believe that the TSX Index is up close to 30% in the past year, with just north of 13% gains coming year to date.
While a smooth ride up in the second half isn’t entirely off the table quite yet, especially when you consider the robust macro and AI tailwinds in play, I do think that preparing for an increase in volatility is never a bad move.
Of course, that doesn’t mean it’s time to rotate out of the past year’s biggest winners (maybe the Big Six Canadian bank stocks) for defensive dividend stocks, which are also getting up there in valuation. Rather, I think staying the course and readying to buy more on periods of volatility could be the go-to plan for investors who do feel like the latest leg of the TSX Index rally is a calm before a potential hailstorm that could hit at any moment.
Despite the many macro shocks (think the U.S.-Iran conflict and the impact on the price of oil) and the non-ideal state of the Canadian economy, as well as lingering inflation that’s weighed on the consumer, the TSX Index has been so incredibly resilient. So, if you’ve been waiting for a sell-off but have only seen prices and valuation keep on climbing, I do think that there are names that still look cheap and ready to march higher as the TSX Index makes its next big move.
At the end of the day, margin of safety and modest multiples alongside strong fundamentals are where you’ll want to be in such a roaring bull market. Right now, I’m a big fan of Fairfax Financial Holdings (TSX:FFH) and Brookfield Corp. (TSX:BN), two long-term winners that are going for quite cheap despite their incredible fundamentals and growth drivers.
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Fairfax Financial
Fairfax stock goes for 8.3 times trailing price-to-earnings (P/E) after moving sideways for the past year. In a way, that’s a correction in itself after the melt-up that followed the past year’s consolidation channel.
Despite the “lost year,” shares are up 321% in the past five years, and, in my view, the digestion phase might be making FFH stock a deep-value option, especially since the fundamentals remain as impressive as ever. If it’s not the single-digit P/E, perhaps the strong underwriting performance or favourable macro climate could be reasons to punch a ticket, even though much of the easy gains are in the rearview.
Like it or not, Prem Watsa, the captain of Fairfax, is a genius allocator of capital. And his stewardship is probably worth a much heftier P/E, at least in my opinion.
Brookfield Corp.
Brookfield Corp. is also seeing shares take a breather in the past year, landing flat returns with a huge dip in the middle. Just like Fairfax, I view the investment manager as a great value, especially as the firm invests in the AI buildout as a landlord and energy provider that stands to collect considerable sums early on and over time.
As the firm bets big on the energy transition while looking for alpha in the AI buildout, my guess is that Brookfield’s market-beating track record could extend. Of course, the “lost year” might raise questions, but, in my view, the name is ready to make up for lost time as the alternative asset manager looks to make the most of a generational technological shift that stands to enrich more than just the AI model-makers at the frontier.
