Buy the dip and sell the rally: it is the only rule of investing that can help you generate good returns in any type of stock. However, buying the right stock at the dip is a precursor to this rule. Some stocks dip because of fundamental issues, and some dip due to temporary headwinds. The latter has the potential to recover from the dip and improve its profits in the long term.
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Telus stock
Telus (TSX:T) fell almost 40% when the interest rate increased and remained high. The stock fell as the telco took significant debt to invest in 5G infrastructure. The rising interest rate continued to increase the interest expense of Telus as the telco took more debt. In the first half, it had a debt of $28.15 billion and paid an interest expense of $1.33 billion in the 12 months ended June 2024. At the same time, its revenue slowed as the company engaged in a price war with BCE.
At the end of June 2024, Telus’s net debt was 3.85 times its EBITDA (earnings before interest, taxes, depreciation, and amortization), beyond its targeted range of 2.20 to 2.70. Its dividend-payout ratio of 83% was also beyond its guided range of 60-75% of free cash flow.
With interest rate cuts and the end of a price war, the above ratios could return to their guided range, giving the telco room to continue growing its dividend per share by 7% next year. You could consider investing a large amount in the stock and lock in a 6.7% dividend yield and a 40% recovery rally.
Dye & Durham stock
Dye & Durham (TSX:DND) could also benefit from the interest rate cut directly and indirectly. The company has a $1 billion debt on its balance sheet. It is looking to reduce and restructure its debt, and the rate cut would help it accelerate this effort and lower its losses.
The legal practice management software provider will also benefit from a recovery in real estate transactions. The Unity platform offers real-time property exchange tracking to enhance property settlement. With a momentum uptick in real estate, DND could see an uptick in its solutions and drive its revenue. Rising revenue and falling finance costs could help DND become profitable.
The stock that lost 70% of its value in the 2021 tech bubble could see a partial recovery due to the above factors.
Magna
While Telus and Dye & Durham could see an immediate impact from rate cuts, the benefit will be reflected in Magna International’s (TSX:MG) earnings at a later date. The automotive component supplier had a volatile recovery from the pandemic as chip supply shortage reduced the supply when demand was strong. When supply increased in 2022, demand fell due to high inflation and rising interest rates. This three-year-long tepid growth saw Magna’s stock price fall by 57% since June 2022.
An interest rate cut will inject liquidity into the economy and increase consumer spending on discretionary items like automotive. Better financing costs will add to the growth of demand. Buying Magna near its pandemic price of around $53 is a value opportunity. The company has the financial flexibility to sustain the cyclical downturn and has a production capacity in place to cater to the rising automotive demand.
This switch in the cycle from downturn to upturn could take 12 to 18 months. Now is the time to invest in the stock and sell it when it crosses its psychological mark of $120 mark.
