2 TSX Stocks Poised for Growth in June

Investing in stocks that trade below their intrinsic value has been a time-tested strategy for equity investors aiming for outsized gains when market sentiment shifts. Identifying a portfolio of undervalued stocks can lead to significant returns as the market corrects itself over time. Here, we discuss two TSX growth stocks, Air Canada and Magna International, which are currently trading at a discount and have the potential to offer substantial gains. 

Air Canada (TSE: AC) 

Air Canada (TSE: AC), with a market cap of $6.16 billion, is the largest airline in Canada, providing scheduled passenger services across the country. Despite the company’s robust performance, the stock price remains 67% below its all-time highs. This underperformance can be attributed to the significant debt burden that Air Canada accumulated during the COVID-19 pandemic. The airline industry was one of the hardest hit, and Air Canada had to take on substantial debt to stay afloat. Rising interest rates have further exacerbated the issue, leading to higher interest payments and thinner profit margins. At the end of 2019, Air Canada’s net debt stood at $2.37 billion, but it had ballooned to $3.78 billion by Q1 2024. 

Despite these challenges, Air Canada has shown remarkable resilience. Over the past 12 months, the company reported an adjusted EBITDA of over $4 billion, resulting in a net-debt-to-adjusted EBITDA ratio of just 0.9 times. This indicates that Air Canada’s earnings are sufficiently robust to cover its debt obligations comfortably. In Q1 2024, Air Canada’s operating cash flow was $1.59 billion. After capital expenditures of $536 million, the company ended the quarter with a free cash flow of $1.05 billion, up from $987 million in the same period last year. This positive cash flow has enabled Air Canada to reduce its long-term debt significantly, from $13 billion to $11.28 billion in the last three months alone. 

Air Canada’s debt reduction efforts have borne fruit, with the company reducing its net debt by more than 50% in the past 15 months. This financial prudence has bolstered the bottom line. Additionally, with $10 billion in total liquidity, Air Canada is well-positioned to invest approximately $15 billion in capital expenditures through 2028. These investments are expected to drive future earnings and cash flows higher. Currently priced at 4.9 times forward earnings, Air Canada is one of the cheapest stocks on the TSX, trading at a 56% discount to consensus price targets. 

Magna International (TSE: MG)

Magna International (TSE: MG), valued at $16.9 billion by market cap, is another TSX stock that has lagged the broader market in recent years. This auto ancillary giant trades 53% below its all-time highs, presenting an excellent opportunity for investors. The stock’s current valuation allows shareholders to enjoy a 4.4% dividend yield while buying a blue-chip company at a discount. Despite the challenging macroeconomic environment, Magna increased its sales by 3% year over year to $11 billion, outperforming the 2% increase in global light vehicle production. 

Magna is on track to increase its sales by 2.8% to $60.1 billion in 2024, with an expected earnings growth of 4.7% for the year. Priced at 7.5 times forward earnings, Magna stock is attractively valued. The company’s earnings are forecast to expand by 16.4% annually over the next five years, suggesting a significant acceleration between 2024 and 2028. This expected growth in profit margins is likely to result in increased dividend payouts. Over the past decade, Magna has more than tripled its dividend distributions, reflecting its commitment to returning capital to shareholders. 

Magna’s robust performance is underpinned by its strategic initiatives and strong market position. The company’s focus on innovation and its diversified product portfolio have enabled it to navigate industry challenges effectively. As the automotive industry transitions towards electric vehicles (EVs) and advanced driver-assistance systems (ADAS), Magna is well-positioned to benefit from these trends. The company’s investments in new technologies and partnerships with leading automakers are expected to drive future growth. 

Both Air Canada and Magna International present compelling investment opportunities for June 2024. Air Canada’s significant debt reduction and strong liquidity position, coupled with its ongoing investments, suggest that the airline is well-placed to capitalize on future growth. Similarly, Magna International’s attractive valuation, robust dividend yield, and growth prospects make it a blue-chip stock worth considering. Investors looking for undervalued TSX stocks with potential for outsized gains should consider adding these two companies to their portfolios. 

Is Bank of Nova Scotia or Enbridge Stock Worth Buying Today?

 Bank of Nova Scotia (TSX:BNS) and Enbridge (TSX:ENB) have seen their stock prices decline from previous highs, presenting opportunities for contrarian investors. But which stock is the better pick for a self-directed TFSA or RRSP portfolio? 

Bank of Nova Scotia: Evaluating the Potential 

Despite trading well below its previous highs, Bank of Nova Scotia (TSX: BNS) has shown signs of recovery, currently hovering near $64.50 per share. The stock's recent uptick reflects a shift in market sentiment regarding interest rates, with investors speculating on potential rate cuts in 2024 after previous rate hikes. 

However, indications of persistent inflation and increased provisions for credit losses raise concerns about economic stability. While near-term risks persist, BNS stock appears undervalued when considering a longer-term outlook of four to five years. With a dividend yield of 6.6%, BNS offers an attractive option for income-seeking investors. 

Enbridge: Assessing Growth Potential 

Enbridge (ENB) has also faced downward pressure on its stock price, currently trading around $48.50 per share, down from previous highs of $59 in 2022. The company's growth strategy relies on a substantial capital program and acquisitions, funded in part by debt. However, higher borrowing costs due to increased interest rates have impacted profitability. 

Despite these challenges, Enbridge anticipates growth in earnings and distributable cash flow over the next few years, supporting ongoing dividend increases. With a dividend yield of 7.5% and a track record of consistent dividend growth for 29 consecutive years, ENB offers an attractive option for income-oriented investors. 

Choosing the Right Pick 

Both BNS and ENB present compelling investment opportunities, particularly for investors seeking dividend income. For TFSA investors prioritizing passive income, ENB's higher dividend yield may be preferable. On the other hand, RRSP investors aiming for a balance of dividend yield and potential capital gains may find BNS more appealing. 

Considering the current prices of both stocks, a diversified approach may be prudent, with investors splitting their investment between BNS and ENB to capitalize on the strengths of each company. 

Conclusion: Making Informed Investment Decisions 

When evaluating stocks like BNS and ENB, investors should consider various factors, including dividend yield, growth prospects, and overall market conditions. While both companies offer attractive dividend yields and potential for growth, individual investor preferences and risk tolerance will ultimately determine the optimal investment choice. 

By conducting thorough research and understanding the unique characteristics of each stock, investors can make informed decisions aligned with their financial goals and investment strategies.