Value stocks

Canadians: It’s time to buy those valuable stocks for your TFSA

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The Bank of Canada aggressively hiked interest rates by 100 basis points to curb inflation. This decision sent the TSX Composite Index down 2% on June 14. The interest rate and the stock market have a negative correlation because a spike in interest rates makes lower-risk fixed-income securities more attractive than higher-risk stocks. Rates will continue to rise throughout the year until inflation returns to the target rate of 2%. You can make the most of this situation by acquiring valuable stocks in your tax-free savings account (TFSA).

Time to buy value stocks

Famed value investor Warren Buffett made billions buying value stocks during a market downturn. The S&P 500 Index has posted an average annual return of around 10.5% since its inception in 1957. But those who have invested in market corrections (10-20% decline) and declines (more than 40%) significantly outperformed the market.

Value investors seek companies that have

  • Financial flexibility to withstand a recession and remain operational;
  • The demand for their product or service; and
  • Be prepared to effectively restart activity when demand returns.

I’ve identified two value stocks that have all three things, plus attractive price ratios and dividends. You won’t regret buying this recession.

Magna Stock

A multi-bagger stock is one where no one is investing in the present, but it has a bright future. Magna International is one such action. Its $2 billion cash reserve and healthy working capital ratio give it the financial flexibility to weather a recession and stay operational. It has $3.5 billion in long-term debt, but its $1.5 billion investment portfolio and positive cash flow can support any short-term maturities.

Magna offers automotive components such as seats, body exteriors, power and vision, as well as complete vehicle assembly. The company has partnered with 24 of the top 25 electric vehicle (EV) manufacturers and has orders from several technology and automotive customers. Its products have significant demand in the electric vehicle revolution, but supply constraints have stalled this revolution. The impending recession could further delay the demand for electric vehicles.

Magna is using this time to invest in technology and find more partners around the world to be ready when demand picks up. It has all the ingredients for a growing business. But the stock fell prey to short-term headwinds, pushing it closer to the oversold category.

Magna stock is down more than 2% today and nearly 44% from its all-time high. Despite this decline, it has a price-to-earnings ratio (P/E) of 13.3, which might seem high at the moment since its EPS has fallen by 40%. But the rally could push Magna’s EPS into double digits, making it a value stock that can double your money during the rally. Plus, you can lock in a 3.3% dividend yield.

True North Commercial REIT

This pure commercial REIT is a lender to government offices and high credit companies like Honeywell Aerospace and General Engines. The REIT has a weighted average lease term of 4.3 years and an occupancy rate of 96%. Despite such a strong tenant base and occupancy rate, the REIT’s share price has fallen 15% this year on fears of a recession.

But the REIT has a strong balance sheet and cash flow. Even though the recession frees up more office space, its 76% rental income from government and high-credit tenants is secure. The demand for land will always be there, and that demand will increase in a growing economy. In the meantime, True North continues to develop its current projects.

Now you can lock in a 9.4% payout yield and enjoy 15-20% capital appreciation as True North stock price rebounds during the economic recovery.

How to Invest in These Value Stocks

The right way to invest in these value stocks is to buy a little each month throughout the recession and keep your costs down. Therefore, when they recover, you could get higher returns.