The Canadian stock market, particularly the Toronto Stock Exchange (TSX), has witnessed its fair share of turbulence in recent times. While some investors may view this as a challenging period, others see it as an opportunity to sift through the market's turmoil and identify potential gems. The key is to distinguish between stocks that are genuine bargains and those that could prove to be traps. In this article, we'll explore the dynamics of the TSX in 2023 and provide insights on two most active TSX stocks worth considering for your portfolio this month, as well as one stock to avoid.
Most Active TSX Stocks
The recent volatility in the TSX market may have left many investors uncertain about their next move. It's a common reaction when stock prices decline, but it's important to remember that markets can reveal both troubled businesses and opportunities. To navigate this situation effectively, it's crucial to differentiate between general market weakness and fundamental business weakness.
If the market's decline is primarily a result of overall economic or geopolitical factors, it can create opportunities to buy high-quality stocks at attractive prices. This is when investors with a long-term perspective can leverage market dislocation to their advantage. To assist you in making informed decisions, here are two TSX stocks to consider for your portfolio this month and one that we recommend avoiding.
1. Enghouse Systems (TSX:ENGH)
If you are looking for a TSX stock with a resilient balance sheet and want to steer clear of interest rate risk, Enghouse Systems might be the right pick. This software company boasts nearly $250 million in cash and no debt on its balance sheet. Enghouse generates substantial cash flows through its communication, networking, and asset software solutions, accumulating approximately $100 million of spare excess cash in recent years.
Traditionally, the company has fueled its growth through strategic acquisitions, targeting annual returns of 15% or more on these investments. However, elevated valuations in recent years have made deploying capital challenging. With the economic environment showing signs of weakness, Enghouse is strategically positioned to acquire financially distressed software service companies, as evidenced by three bargain-priced acquisitions in 2023.
The company's cash-rich balance sheet allows it to capitalize on potential opportunities that market dislocation may bring, making it an appealing choice for investors seeking stability and growth.
2. Calian Group (TSX:CGY)
Another TSX stock that is catching the attention of astute investors is Calian Group. While the stock has faced a 27% decline in 2023, it's important to note that this dip has made it more attractively priced, with a price-to-earnings (P/E) ratio of 12, its lowest valuation in five years.
Calian Group operates a diverse range of businesses, including healthcare, training, satcom, and cybersecurity, with many of its contracts tied to government agencies, providing a reliable source of revenue. Like Enghouse, Calian has expanded through strategic acquisitions.
While the company did experience a weak quarter, its management swiftly adjusted its cost structure and focused on preserving margins. Additionally, Calian holds approximately $23 million in net cash, which mitigates interest rate risk and strengthens its financial stability. For investors seeking a long-term investment with strong potential, Calian Group is worth considering.
1 Stock to Avoid in 2023: Enbridge (TSX:ENB)
While Enbridge may appear tempting due to its high yield of over 8% and ownership of valuable infrastructure assets, it's a TSX stock that we recommend avoiding at the moment. The company's excessive reliance on leverage and equity for financing its growth raises concerns, especially in a higher interest rate environment.
Enbridge carries a substantial debt load of over $79 billion, constituting nearly 45% of its enterprise value. A recent major acquisition of three U.S. gas utilities added close to $15 billion of debt, and the issuance of additional equity diluted shareholders by approximately 4%. Unfortunately, this deal doesn't seem favorable for shareholders, as it required a premium to Enbridge's own valuation, making it unlikely to unlock significant synergies to benefit investors.
From a total return perspective, Enbridge does not appear to be a sound choice for long-term investors in the current market conditions.
Conclusion
The Canadian stock market in 2023 presents both challenges and opportunities. By carefully evaluating the financial health and growth potential of individual companies, investors can make informed decisions and position themselves for success in the evolving landscape of the TSX. Consider the opportunities presented by Enghouse Systems and Calian Group, while exercising caution with TSX stocks like Enbridge, which may not align with your long-term investment goals. Remember that investing involves risks, and it's essential to conduct thorough research and consult with financial experts before making investment decisions.
