If the TSX Rally Keeps Going, These Are the Stocks Late Buyers May Chase

After the TSX hits fresh highs, two steady Canadian leaders could offer a smarter way to ease into the rally.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 26, 4:00 pm EDT

| More on: ATDIFC

Key Points

The TSX just hit a record, but buying what’s already soaring isn’t a real plan.
Couche-Tard’s big Żabka deal could boost growth, but integration and fuel weakness are real risks.
Intact looks like a quieter value play, with strong profits and dividends, despite storm-claim pressures.

A market rally becomes emotionally expensive long before stocks look absurd. Cash feels wonderfully prudent during a correction. After several record highs, it starts looking unemployed.

The S&P/TSX Composite Index recently closed at a record 36,759.29 following five consecutive gains. The rally could continue, although buying whatever rose yesterday isn’t much of a plan. I’d concentrate on Canadian stocks whose next move could be supported by improving businesses or fresh catalysts.

Investors arriving late frequently want recognizable, profitable companies with stories that can be explained before the elevator reaches the next floor. Alimentation Couche-Tard (TSX:ATD) and Intact Financial (TSX:IFC) fit that description for different reasons.

I wouldn’t wait for the perfect dip or invest everything immediately. Splitting a planned investment into several purchases can establish exposure while leaving cash available if enthusiasm temporarily gets ahead of the fundamentals.

stocks climbing green bull market — Source: Getty Images

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ATD

Couche-Tard stock operates convenience stores and fuel locations under brands including Circle K. Its enormous network provides purchasing scale, while food, beverages, private-label products, and digital loyalty programs can gradually reduce its dependence on fuel.

Fiscal fourth-quarter adjusted earnings per share increased 58.7% year over year, while consolidated same-store merchandise revenue rose 2.2%. Couche-Tard has now added another potential growth engine through its planned US$8.6 billion acquisition of Żabka, which operates more than 13,000 stores across Poland and Romania.

Near $92.56, Couche-Tard stock trades around 19.7 times trailing earnings. That isn’t a clearance-bin valuation, but a successful Żabka integration could expand its European footprint considerably. The risk is equally clear. Financing and integrating the company’s largest acquisition will require disciplined execution, particularly if fuel demand remains soft.

IFC

Intact is Canada’s largest property-and-casualty insurer, selling coverage across Canada, the United States, the United Kingdom, and Ireland. Insurance rarely receives the loudest applause during a rally, which can make it attractive when buyers eventually look beyond the market’s most obvious winners.

Despite elevated catastrophe and large-loss claims, Intact produced a 17% operating return on equity during the second quarter. Book value per share increased 13% year over year, suggesting the underlying franchise continued creating value through a difficult claims period.

At approximately $270.44, Intact trades near 15 times trailing earnings and pays a $1.47 quarterly dividend. More severe storms could increase claims, while continued weakness in its United Kingdom and Ireland operations could pressure underwriting profitability. Weather has never shown much respect for an earnings calendar.

Foolish takeaway

An investor could divide approximately $10,000 between the two companies as follows. The modest dividend income is a bonus rather than the main attraction, but add in returns aligned with the compound annual growth rate (CAGR) of the last decade, and those numbers look far more appealing.

COMPANY	RECENT PRICE	NUMBER OF SHARES	ANNUAL DIVIDEND	ANNUAL TOTAL PAYOUT	FREQUENCY	TOTAL INVESTMENT	10-YEAR CAGR	POTENTIAL VALUE AFTER 1 YEAR	POTENTIAL 1-YEAR GROWTH
ATD	$92.56	54	$0.84	$45.36	Quarterly	$4,998.24	13%	$5,646.01	$647.77
IFC	$270.44	18	$5.88	$105.84	Quarterly	$4,867.92	14%	$5,550.89	$682.97
TOTAL	—	72	—	$151.20	Quarterly	$9,866.16	13.5% weighted	$11,196.90	$1,330.74

Neither stock guarantees protection from a market decline, and two companies don’t provide complete portfolio diversification. However, Couche-Tard stock offers a major expansion catalyst, while Intact provides profitable insurance operations at a lower earnings multiple.

If the TSX rally keeps going, those qualities could attract investors who waited for reassurance. I’d rather start gradually before the crowd arrives than chase either stock simply because its chart suddenly becomes more exciting.