The Tax-Free Savings Account (TFSA) can be an excellent tool for investors looking to avoid the excessive fees and taxes that can come with other investment accounts. Since 2009, the TFSA has offered the perfect option for those looking to start investing but don’t have a lot to put away.
However, as fellow Fool writer Kay Ng recently pointed out, this can lead to some investors taking unnecessary risks, hoping for a big payout.
“Because what’s earned inside TFSAs is tax free, some investors choose to take excessive risk, such as buying penny stocks in the hopes that some would fly to the moon. That’s more risk than most investors can handle and a quick way to lose money,” Ng stated.
Ng goes on to say that a better option is to find quality stocks with future valuation that would give investors a strong potential upside. That way, when you buy a stock on the cheap, you know that analysts have given a range that will still give you major growth, but you also have historical performance to fall back on that should lead to further future growth.
Here are three options I would consider that fall right into this category and would make a perfect TFSA portfolio.
TD
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is well below fair value at the moment, trading at around $72 per share as of writing. With a fair value at $81 per share, that’s a potential upside of 12.5%, with analysts predicting the stock to rise as high as $90 over the next 12 months.
As for historical performance, TD has a solid history of steady growth and has proven to be a great stock during a recession. The stock rebounded within a year back to where it was trading before the recession and continued on a steady track since. For this year, the stock is up about 6%, even in a poor economic climate on the verge of a recession.
This likely comes from the bank’s executive status as tied for largest bank in Canada, with strong revenue coming in despite economic fears. This comes from recent expansion into the United States — where TD has become one of the top 10 banks in the country — and from entering the lucrative industry of wealth and commercial management.
Pembina Pipeline
Another strong option is Pembina Pipeline (TSX:PPL)(NYSE:PBA). Pembina trades at fair value at the moment at around $49 per share, with analysts predicting a rise as high as $62 per share over the next 12 months. This would give a potential upside of 27% as of writing.
Looking at historical performance, despite being an energy stock, Pembina has seen a reasonably steady incline over the last two decades. The stock has climbed 460% since 2000, with a slight dip back in 2015, before recovering within a few months. The stock has dropped a bit in with the oil and gas industry but has still increased 19% year to date.
Part of Pembina’s strength is the pipeline company is in growth mode, with a balance sheet that gets 85% of income from long-term contracts. This has made it a strong investment for dividend seekers at 4.95% as of writing. The company has $5.5 billion of secured projects in the works and just bought Kinder Morgan assets for US$4.35 billion.
Lightspeed
Last, but certainly not least, we have Lightspeed POS (TSX:LSPD), a stock currently trading at around its fair value of about $40 per share. Analysts believe the stock could rise as high as $60 per share in the next 12 months — a potential upside of 50% as of writing.
This stock is the riskiest, as it doesn’t have the historical performance we like to see, but its initial public offering (IPO) back in March caused quite the stir. The company made $240 million from its IPO and has increased 133% since then! Its IPO was the best in Canada for the year, and the best of any tech stock in the last nine years.
What has investors excited about Lightspeed is the company’s strength in the e-commerce business coupled with already amazing earnings reports. Sales growth came in at more than 40% year over year in its most recent quarter, and there is still so much room for this business to rise, as the company expands outside North America.
