There are more than a few Canadian momentum stocks that look intriguing as we head into April. Indeed, chasing hot momentum plays can be dangerous if you don’t conduct a thorough analysis.
At the same time, momentum plays shouldn’t be avoided just because they’re up by a considerable amount over a short timespan if earnings are surging at an accelerating rate and the valuation metrics stand to contract accordingly. Sometimes, you really do need to pay up to get high-quality growth. But Tax-Free Savings Account (TFSA) investors must ensure they’re not at risk of overpaying for a firm that may struggle to beat expectations as industry dynamics begin to shift against it.
That’s why the cyclical firms (think those in the heavy-duty equipment, commodity, or auto industries) can be tough to value given the boom-and-bust nature of demand that can pave the way for absurd levels of volatility. In a cyclical upswing, such a cyclical firm stands to “over-earn,” only to underearn at some point down the road.
That’s the boom-and-bust nature of cyclical discretionaries in a nutshell. In this piece, we’ll look at two non-cyclical momentum stocks that I believe can continue growing at a steady pace from here as underlying fundamentals improve. So, without further ado, please do consider the following if you’re looking to hit back at Mr. Market.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is a consumer staple that tends to be a steadier upward ride compared to most other stocks (especially the cyclicals). The convenience store giant has continued to grow its top and bottom lines organically and via smart deal-making. With a rock-solid balance sheet and enough financial flexibility to make many tuck-in acquisitions (or one game-changing deal, perhaps in the grocery space), Couche-Tard looks to have an “option” whenever the industry and economy head south in a hurry.
More recently, Couche-Tard inked a deal to bring DavidsTea products to around 1,500 Couche-Tard-owned stores (mostly Circle K). I think the deal is brilliant and could really take merchandise sales growth to the next level. DavidsTea is a trusted and tasty brand. I’m sure Canadians can appreciate the convenience of picking up their favourite teas at the local Circle K or Couche-Tard alongside their convenient mini-hauls!
With value-conscious managers, I’d look for shares of ATD to continue inching steadily higher from here. The stock recently suffered a 10% correction and is looking absurdly cheap for TFSA investors looking to jump in around $77 and change. Given the earnings growth profile, I believe the 18.6 times trailing price-to-earnings multiple is way too low.
TFI International
TFI International (TSX:TFII) is another earnings grower that’s really been scorching this past year, now up 38% over the timespan. With a modest 1% dividend yield and the means to rocket on the back of Canada’s next big expansion (I think one could hit after the Bank of Canada slashing rates), I view TFII stock as an intriguing long-term buy here and now.
- We just revealed five stocks as “best buys” this month … join Stock Advisor Canada to find out if Enbridge made the list!
Shares look like a steal for TFSA investors while they’re going for less than 21.5 times forward price to earnings. Indeed, the less-than-load (LTL) trucker still has what it takes to dominate despite its relatively small $18.24 billion market cap.
