2 Stocks to Buy if You Think the TSX Is Overvalued

Even if it appears that the TSX is overvalued, Finning International Inc. (TSX:FTT) and Linamar Corporation (TSX:LNR) are trading below their true values. Recession fears, not weak financials, are affecting the stock prices.

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The TSX is not as overvalued as the U.S. stock market. Because of the corporate tax cuts granted to American companies, earnings increased. Those tax breaks were incorporated into the stock prices, making them seriously overpriced.

If you think the TSX is also overpriced, you can purchase consumer cyclical stocks like Finning International (TSX:FTT) and Linamar (TSX:LNR). The stocks could be short-term trading opportunities or long-term holdings depending on your financial objectives.

The CAT brand

Finning International is the largest Caterpillar dealer that sells, rents, finances, and provides customer support services for equipment and engines made by Caterpillar. The CAT brand is synonymous with heavy equipment.

Market analysts have mixed reactions or observations to Finning as a stock investment. One side says that FTT is a deeply cyclical stock because the demand for Caterpillar equipment is also cyclical. Hence, short-term investors purchase the stock for trading opportunities.

But those with better understanding of the behaviour of the business see Finning as a good long-term hold. The company pays 3.4% dividend with a payout ratio of 70.8%. Long-term investors are aware of the seasonal strength of Finning. Therefore, the spikes and dips are part and parcel of the investment choice.

In terms of stock performance, FTT is up by only 2.77% year to date. Finning is underperforming on account of exaggerated recession fears. But if you look at the financials, the company has a great balance sheet. Net income has averaged $224 million the last two years at average revenue of $6.6 billion.

The growth estimate this year is 4.8% and 19.7% in 2020. Hence, any pullback is a buying signal, but don’t expect the price to hit rock bottom. There’s a potential upside of 41.4% in the next 12 months if the growth estimate holds true.

Laser focused on growth

Linamar, Canada’s second-largest automobile parts manufacturer, is another cyclical stock that’s beset by recession fears. LNR is underperforming, although it’s up 2.5% year to date. Unfortunately, the stock performance is not reflective of the company’s true state of affairs.

The company is delivering net income of over $500 million annually for the last three years. CEO Linda Hasenfratz, the inheritor of the family business, is the driving force behind the global success of the $3 billion manufacturing company.

The Q1 2019 results showed sales rising by 4.3% to $1.9 million versus Q1 2018 amid a market slowdown and tough environment. But despite the $27.2 million drop in operating earnings, the company remains laser focused on continuing to increase both top and bottom line in 2019. The recent Canada-U.S.-Mexico auto parts tariff issue posed a challenge to earnings growth.

Again, investors should understand the intricacies of the auto parts business to appreciate Linamar. The company pays 1% dividend with a payout ratio of 5.6%. Over time and as earnings grow, we could expect some dividend growth. For now, there’s a potential 73.2% capital gain if you were to go by analysts’ forecasts.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

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