Got $10,000 Sitting in Your TFSA? I’d Make This Move Before the Next Rally

Letting $10,000 sit in a TFSA feels safe, but it can quietly lose buying power if it stays uninvested.

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 September 10, 11:45 am EDT

Cash inside a Tax-Free Savings Account (TFSA) isn’t harmful. It sits quietly, avoids market declines, and never sends an alarming notification before breakfast. The problem begins when “temporary” cash becomes a permanent resident.

Money held inside a TFSA receives no special benefit simply because the account has a tax-free label. If it earns little or nothing, inflation can still reduce its purchasing power. The account’s real advantage comes from sheltering investment income and capital gains over many years.

Income and growth financial chart — Source: Getty Images

Give the money a job

That doesn’t mean investing the entire $10,000 immediately. Markets have already climbed, and another correction remains possible. I’d divide the cash into four $2,500 purchases, invest the first portion now, and schedule the remaining purchases over the next several months.

Before investing, I’d confirm that the $10,000 isn’t needed for an emergency or near-term expense. Long-term money has a different assignment. It needs enough growth to outpace inflation and make the most of the tax-free compounding available through a TFSA.

In my view, I’d use the first $2,500 purchase to begin building a position in Hammond Power Solutions (TSX: HPS.A).

Equipment behind electrification

Hammond Power stock designs and manufactures transformers and power-quality products. These components help adjust voltage so electricity can safely travel through data centres, factories, renewable-energy projects, transportation systems, and other infrastructure.

Transformers rarely appear in glossy artificial-intelligence presentations. Without them, however, all those chips and servers become an extremely expensive collection of furniture. Demand is being supported by data centre construction, electrification, grid investment, and industrial expansion.

Hammond Power stock has manufacturing operations across Canada, the United States, Mexico, India, and Europe following its acquisition of AEG Power Solutions. That acquisition expands Hammond’s products and geographic reach, although it also introduces integration costs and additional debt.

Growth is already visible

Second-quarter sales increased 44.7% year over year to a record $324.8 million. United States and Mexican sales climbed 73%, supported by data-centre shipments and improving industrial demand.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 59.4% to $53.2 million. The adjusted EBITDA margin also improved to 16.4%, helped by pricing, higher custom-product sales, and better utilization at the company’s newer Mexican facility.

Perhaps the most important number is backlog. It remained 96.9% above the prior-year level, even after record shipments. That provides considerable visibility into future demand. Right now, a $2,500 purchase could pick up 10 shares. If the stock declines, the next purchase acquires more shares. If it rallies, the portfolio already owns a position, so you’re looking good either way.

At what price?

Hammond Power stock has retreated substantially from their 52-week high, but isn’t conventionally cheap. Near the recent price, the stock trades around 47 times trailing earnings.

That valuation assumes considerable future growth. A slowdown in data centre spending, weaker transformer orders, tariffs, higher material costs, or problems integrating AEG could produce another sharp decline. Reported second-quarter earnings also fell because of share-based compensation and acquisition-related expenses, even as adjusted results improved.

I’d therefore keep Hammond Power stock as one position within a diversified collection of Canadian growth stocks, not transform the entire TFSA into a referendum on data centres.

Bottom line

Leaving $10,000 uninvested can feel prudent, but waiting for complete certainty usually means watching the next rally from the cash section.

I’d invest $2,500 in Hammond Power stock now and spread the remaining purchases over several months. Its record sales, enormous backlog, and exposure to electrification provide a compelling growth case. The gradual approach leaves room for the fact that compelling stocks can still have thoroughly unpleasant weeks.