The TSX stock market is fraught with both risks and opportunities. Canada’s stock market is significantly smaller than the U.S. markets. It is more concentrated in a few major sectors (financials, energy, and real estate).
Given this dynamic, it is not the best market to index (unless you want overt exposure to the above). However, inside the TSX, there are some stocks in great businesses that could be good long-term investments. You need to be very choosey because there are also a lot of bad to mediocre stocks in Canada.
If you don’t mind the hunt for great businesses to hold for the long term, here are two TSX stocks to buy today and one to avoid.
A beaten-up TSX retail stock
Aritzia (TSX:ATZ) might be a counterintuitive pick. Its stock has suffered terribly in 2023. It is down 49% this year.
The company saw massive growth during the COVID-19 pandemic. Unfortunately, it got caught with a rise in expenses, too much inventory, and a lapse in demand due to a slowing economy. This TSX stock was pricey in 2022. A slurry of disappointing results caused the stock to sell off.
The good news is that the company is working hard to update its clothing lineup, reduce inventory, and get margins back to their historic range.
Aritzia continues to have very strong traction in the U.S. It has been earning a fast 12-18-month payback on new store launches. It has six new boutiques slated for opening over the next six months.
Aritzia has the potential to nearly triple its store count in America. It has a large long-term opportunity to grow. Today, this TSX stock trades at close to its lowest valuation in the past five years. If you don’t mind buying a stock that has had some challenges, there could be big opportunities as well.
A TSX stock for the long term
Another TSX stock that could be a good opportunity at today’s price is Canadian Pacific Kansas City Railway (TSX:CP). This stock has pulled back modestly by 4% this year. This year, Canadian railroads have faced challenges from strikes, weather, fires, and a decline in shipping volumes.
CPKC is one of the most expensive railway stocks in the sector. However, the company has an exceptional track record of delivering above-average returns.
Likewise, after its acquisition of Kansas City Southern Railroad, it is now the only network that connects Canada, the U.S., and Mexico.
This should yield a significant competitive advantage and elevated growth opportunities. It believes earnings could double over the next four or five years. For a high-quality business with above-average growth, the pullback is a decent buying opportunity.
A utility with a nice yield but some troubles
One TSX stock that I would avoid right now is Algonquin Power and Utilities (TSX:AQN). The company has had operational and balance sheet challenges. This TSX stock took on too much variable-rate leverage when rates were cheap. Now, it is paying the price.
Unfortunately, Algonquin must deleverage fast. It has become a forced seller of its renewable power portfolio. The timing for this transaction is not good. Its portfolio has been plagued by weather, operational, and financial issues.
Inflation has made renewable investments far less profitable than previously. Purchaser demand for these types of assets has waned recently.
While this TSX stock yields 7.3% (even after it cut its dividend), it may not be sufficient to compensate for the several headwinds the company faces today.
