It’s a tough time for Canadian investors. The TSX index suffered a lost decade with no returns, thanks mainly to commodities and materials companies, the American greenback continues strengthening against the loonie, short-sellers have begun targeting Canadian companies with half-baked theses, and the TSX only seems to follow in the footsteps of the S&P 500 when it’s heading in a downward trajectory.
Given the investment environment, many Canadians find that they’re between a rock and a hard place. The USD/CAD exchange rate is abysmal at $0.73 at the time of writing, so by overweighting U.S. securities, you’re taking a hit that could bite you should you end up selling if the Canadian dollar finds relief. Add U.S. dividend withholding taxes into the equation and it’s clear that now isn’t an opportune time to go on the hunt for U.S. stocks unless the risk/reward trade-off is enough to offset the unfavourable rate that exists today.
So, what’s a Canadian to do with a fresh $6,000 in TFSA funds?
It’s time to pick individual Canadian stocks. More specifically, the severely undervalued stocks of solid businesses that aren’t as bad as their stock charts suggest. There are financially healthy, free-cash-flow-generative, growing businesses out there that are the cheapest they’ve been since the Great Recession.
Worried about a recession? Some TSX stocks are already trading as if a recession were already a given, especially the single-digit P/E stocks that are now abundant.
Consider Industrial Alliance (TSX:IAG (LON:ICAG)) and Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), two stocks that have jaw-droppingly low trailing P/E multiples of 7.9 and 8.7, respectively. Both companies have nothing dire going on behind the scenes, yet both names trade at a substantial discount to book relative to their respective historical averages.
Industrial Alliance, the Canadian insurance and wealth management service provider, has a not-so-impressive 3.8% dividend yield but has the capacity to hike its dividend by a very generous amount for many years to come. For investors willing to sacrifice a bit of upfront yield, there’s tremendous value to be had, as the company could easily deliver a huge double-digit dividend hike and still have enough wiggle room to pursue growth opportunities.
CIBC caters to the more income-oriented of value investors with its 5.4% dividend yield, the highest it’s been in recent memory. The financials, especially the big banks, have been hit really hard due to geopolitical issues, among other macro fears that wouldn’t bode too well for banks or insurers.
With an improving business down south, CIBC is starting to prove to its bigger brothers in the Big Five that it can compete and operate at a level high level. Unfortunately, investors don’t seem to care too much about the progress made over the past year, as the perennially cheap stock just continued to become cheaper.
For those with a long-term time horizon, CIBC is a steal. The dividend aristocrat will continue to reward investors with a dividend, even if the worst fears of investors come true. Although CIBC was caught with its pants down in the last recession, the bank is better-equipped to weather the next storm.
Foolish takeaway
Whether you want a deep-value insurance play or an income play, both Industrial Alliance and CIBC is absurdly cheap stocks that could bounce in a big way if the recession fears are unwarranted.
The economy, while slated for a slowdown in 2019, is still hot and because of this, interest rates are heading higher. A rising rate environment bodes really well for these two dirt-cheap financial firms, so I’d pounce on both names before they correct upwards.
Stay hungry. Stay Foolish.
Fool contributor Joey Frenette owns shares of CANADIAN IMPERIAL BANK OF COMMERCE.