Diversification is an investing concept — spreading your allocations among different economic sectors, asset classes and geographical regions reduces risk and creates a better profit and loss profile. You can search for investments outside the U.S. for an interesting perspective and necessary diversification. Take a look at the opportunities in the Toronto Stock Exchange (TSX) and find the best TSX stocks to buy now.
Quick Look at the Best TSX Stocks:
- Shopify
- Bank of Nova Scotia
- Altuis Minerals Corporation
- Fortis
- Suncor Energy, Inc.
History of the Canadian Stock Market
The Canadian and the U.S. economies are positively correlated due to geographical location and similar fiscal and central bank policies. If an industry strives in the United States, it does equally well in Canada. The stock markets in both countries generally move in the same direction and are expected to produce similar results.
But over the last decade, the Canadian stock market has been a massive underperformer. The chart below compares the TSX Index of Canada to the S&P 500 index of the United States.
The TSX index includes Canada's largest and most prominent companies listed on the Toronto Stock Exchange. As the S&P 500 Index in the United States, it is viewed as a barometer for the Canadian economy's health.
As you can see on the chart, investing in the S&P 500 index has resulted in 210% return compared to just 34% return if invested in the TSX index. This is a drastic difference, which poses the question: Is the American economy doing so much better than the Canadian economy?
While the United States has done slightly better based on some popular economic measures, the real answer lies in sector diversification and how those indexes are constructed. The Canadian economy is more dependent on the energy and the financial sectors, which are heavily represented in the TSX index. Both of those sectors appeared to be on the wrong side of a secular economic trend.
The following table illustrates how skewed the representation is of specific sectors. The U.S. index is heavily represented by the technology sector, which has outperformed considerably over the last 10 years. On the other hand, the Canadian counterpart is playing catch up when it comes to technology sector representation.
The financial sector has been struggling in the low interest-rate environment and heavy regulation ever since the financial crisis of 2008. Meanwhile, the energy sector has experienced a severe bear market over the last several years due to lower commodity prices and trends towards new energy sources.
The above analysis should not be viewed as a discouragement of investing in Canadian stocks. In fact, the exact opposite is true. The S&P 500 index is relatively overvalued, while the TSX index is reasonably priced. The interest-rate environment shows signs of reversing the prior course, which is favorable for banks and financial stocks. And the recent uptrend in commodities is positive for the energy and materials sectors. All of the above are welcome developments for the Canadian stock market.
Trending TSX Stocks Right Now
Here are our top picks for trending TSX stocks right now.
Shopify Inc. (SHOP)
One of the most successful stories over the last several years is Shopify Inc. (TSE: SHOP). Shopify provides a cloud-based multi-channel commerce platform for businesses internationally. The stock is listed on both Toronto and New York stock exchanges.
Ever since the company went public in 2015, it has achieved revenue growth of over 65% annually. Shopify has become a beneficiary of COVID-19 when businesses have been forced to go online. Its success is not a fluke. Shopify's business model will make them a significant player in their space for a long time.
We must acknowledge the fact that the stock is expensive. Just like numerous cases in history, sometimes the stock outpaces the growth of the company. The growth of Shopify is spectacular. The appreciation of the stock is even more incredible.
Shopify is a momentum play in the short-term and a solid investment in the long-term. The stock is volatile, which makes it attractive to short-term traders. Simultaneously, volatility makes it possible for longer-term investors to find a reasonable price to accumulate the stock.
If you buy the stock at current levels, you must be prepared for wild swings. For example, a disappointing earnings report or a general correction in the stock market or the technology sector will undoubtedly punish the stock. This is a classic case of the "good company versus expensive stock" debate.
Bank of Nova Scotia (BNS: TO)
Let’s a drastic U-turn here from one of the most volatile stocks to one of the most stable. Let’s look at the durable and reputable financial stock.
Founded in 1832, the Bank of Nova Scotia provides various banking products and services and remains one of Canada's top 5 banks today.
It hasn't missed a dividend payment in 188 years, and today's dividend is 5.30%. In today's world, where yield is difficult to find, a high-yielding stable stock is a diamond in the rough. BNS represents stability for long-term investors.
With a market cap of nearly $70 billion and a forward P/E ratio of 11.07, the stock looks attractive for long-term investors. Even after the latest price advance, the stock looks like a rare combination of stability and high dividend play. Accumulating BNS on weakness could pay off in the longer-term.
Altius Minerals Corporation (ALS.TO)
Altius Minerals Corporation operates as a diversified mining royalty and streaming company in Canada and South America. The company owns royalty and streaming interests in 15 operating mines covering copper, zinc, nickel, cobalt, iron ore, precious metals, potash and thermal and metallurgical coal. It also works in development stage royalties in renewable energy and various pre-development stage royalty interests in mineral commodities.
Altius is at the right place at the right time. It is expected to benefit considerably from rising commodity prices. The stock has been stable for 10 years despite a bear market in commodities.
The stock is expected to climb back to its all-time high around $28 per share achieved in 2007. Keep in mind that this is a smaller-cap stock with a $622 million market cap, making it somewhat volatile.
Fortis (FTS: TO)
Fortis Inc. operates as an electric and gas utility company in Canada, the United States, and the Caribbean. The company has been around since 1885 and is one of the major utilities companies in Canada.
Utility stocks represent stability and dividends. This is precisely what Fortis offers to investors. Being a part of the most predictable sector of the economy with a market cap of $18.9 billion and a reasonable forward price to earnings ratio of 17.6, Fortis is trading at a slight discount to its industry peers.
The most attractive feature of the stock is dividends. FTS offers an annual dividend yield of 3.93%. The company is consistently raising its dividends by nearly 6% per year and is expected to continue this trend for at least the next 4 years.
Fortis provides a rare combination of a stable price appreciation and a high dividend yield. This combination is hard to find in today’s investment environment.
Suncor Energy Inc. (SU.TO)
Suncor Energy Inc. operates as an integrated energy company. This Canadian energy giant has been a victim of a long-term decline in commodity prices. But the revival of crude oil and the reinflation environment makes Suncor a primary candidate for a recovery play.
There are signs that the turnaround may have already started. Over the last 4 quarters, Suncor has surpassed consensus earnings estimates three times. And a juicy dividend yield of 3.88% serves as an excellent income boost for investors.
As you can see on the following chart, the stock has been stuck in a wide trading range. Now it is trading closer to the bottom of that range, which makes it more attractive.
Rising oil prices are expected to trigger a so-called mean reversion trade, meaning that the stock is expected to move back up to the middle of that range.
Best Canadian Brokerage Accounts
If you are interested in investing in Canadian stocks, you can do it through any broker in the United States. There are also great options when it comes to finding a brokerage firm in Canada. Take a look at our recommended brokerages now.
- Best For:Active and Global TradersVIEW PROS & CONS:Securely through Interactive Brokers’ website
- Best For:Active TradingVIEW PROS & CONS:securely through Scotia iTrade's website
Best Canadian Stock Research Platforms
Researching Canadian stocks requires a platform that provides reliable, up-to-date information and analysis. Here are 2 Canadian stock research platforms that serve up the details.
- Canadian stock research
StockTrades.ca
StockTrades.ca provides Canadian investors with the best possible tools to increase their investment portfolios. Its excellent analysis and research combined with screeners, model portfolios and sector evaluations make it convenient and efficient to investigate Canadian investment opportunities.
- Active and Global Traders
Interactive Brokers
Interactive Brokers is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. You can buy assets from all around the world from the comfort of your home or office with access to over 135 global markets. Options, futures, forex and fund trading are also available, and most traders won’t pay a commission on any purchase or sale.
IBKR is geared primarily toward experienced traders and investors but now with the availability of free trades with IBKR Lite, casual traders can also acclimate to IBKR offerings.
TSX Stocks: Time for Canadian Stock to Outperform
Changing economic trends point to a revival in commodities and a potential end to deflation, and this is the primary reason to look at Canada as a lucrative investment region.
Timing is everything when it comes to investments, and allocating more capital to TSX stocks seems like a prudent move at the beginning of 2021.
Frequently Asked Questions
What is TSX?
TSX stands for the Toronto Stock Exchange.
Is the TSX as big as the NYSE?
No, the NYSE is much larger than the TSX.
What are the best TSX stocks?
Check out Benzinga’s list of the best TSX stocks on above.
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