With the broader markets picking up momentum, investors may wish to look closely at the breakout names that may have further to fly as we head into election season and, shortly after, Santa Claus rally season. Undoubtedly, buying stocks on strength can be a risky proposition, especially if you’re paying a big, fat premium to historical averages.
That said, if the fundamentals have improved in the past year to justify the higher multiple, I think it makes sense to pay a somewhat higher multiple for a fantastic business that’s firing on all cylinders with tailwinds at its back.
Undoubtedly, the great Warren Buffett once noted that it’s far better to pay a “fair price” for shares of what he deems as a “wonderful business” than the other way around. Indeed, cigar-butt investing (buying dirt-cheap stocks of companies that aren’t all so wonderful) can have its drawbacks.
And for those inexperienced with picking up deep-value bargains, one may end up wandering into a value trap. Either way, here are hot stocks that I find to be cheap with more upside potential for the rest of this fourth quarter.
While I have no idea if they’re set to soar (they arguably already have) any further, I do think the following names are great additions for those with a time horizon between four and six years.
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Fairfax Financial Holdings
It’s about time we gave Prem Watsa, the genius manager behind Fairfax Financial Holdings (TSX:FFH) more credit. With shares up a scorching-hot 177% in the past two years, Fairfax has actually put the TSX Index to shame. Indeed, I don’t think the run is over with, either. The company keeps making smart, deep-value moves in the Canadian market.
Whether we’re talking about the acquisition of Sleep Country Canada, the largest sleep retailer in the country, or the more recent purchase of a controlling stake in hockey brand Bauer (a personal favourite of mine!), Fairfax has not shied away from swinging at the low-cost opportunities thrown in its strike zone.
In a prior piece, I highlighted that there was no shortage of bargain-priced businesses in Canada and that Fairfax could really jolt its business by pulling the trigger on them as their targets stumble across hard times. As rates fall and Fairfax continues to make smart deals, I think FFH stock’s market-beating ways can continue on.
In any case, the stock goes for 7.7 times trailing price-to-earnings to go with a 1.2% dividend yield. With a nice dividend, a cheap multiple, and continued momentum, I’d not hesitate to scoop up shares this October.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY) stock is on a hot run of its own, now up 40% in the past two years. Indeed, the $246.2 billion banking top dog has left its peers in the dust. Though shares are markedly pricier than some of its peers at 15.4 times trailing price-to-earnings, I still think the stock is more than buyable at $174 per share.
However, I would hope for a pullback before really piling into shares. Given Royal’s impressive strengths and the likelihood the Canadian economy could improve in the new year, I’m not so sure that dip-buyers will get the correction they’re looking for. Maybe buy a quarter position here with the intent of putting the other three-quarters to work after a plunge.
