Why These TSX Stocks Are Solid Bets on Canada’s Economic Recovery

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Written by Karen Thomas, MSc, CFA at The Motley Fool Canada

The Canadian economy continues to struggle with higher interest rates and inflation. Household debt has ballooned to unsustainable levels, and the consumer is at risk. As a result, the TSX is down 10% from its 2022 highs, with many TSX stocks down even more.

Here are two TSX stocks to buy if you think the worse is behind us.

Canadian National Railway: A TSX stock with a long track record

The Canadian railways, including Canadian National Railway (TSX:CNR), are the backbone of the Canadian economy. They transport more than $250 billion of goods annually. These goods come from a diversified list of sectors. This includes the resource sector (grain crops), crude oil, manufactured products, and consumer goods.

The price chart below illustrates the growth that’s occurred at CN Rail over the last 10 years. But CN Rail stock has come off recently (interestingly, also down roughly 10% from 2022 highs), as the risks — higher interest rates, inflation, and elevated debt levels — to the economy are mounting.

But CN Rail has a lot going for it. The company enjoys a solid position in an industry that has strong barriers to entry. Also, CN has become leaner, more efficient, and more profitable over the years. For example, its operating ratio, which is defined as operating expenses as a percentage of revenue, has continued to trend down. In 2012, the operating ratio came in at 66.2%. In CN’s latest quarter, it was 61.5%.

So, it’s clear to me that if you’re betting on an economic recovery, CN Rail stock is a stock to buy. The only question in my mind is the timing of the recovery. CN’s volumes remain dismal at this time, with second-quarter volumes down 8% due to weakness in areas such as consumer products and lumber.

TD Bank: A leading bank

Like CN Rail, Toronto-Dominion Bank (TSX:TD) is another barometre for the economy. When the economy is humming, consumers are healthy, loans are thriving, business activity is strong, and, as a result, the banks are doing well. Over the long term, TD stock has been a solid TSX performer, as we can clearly see from TD Bank’s stock price graph below. It has weathered many storms, thanks to its strong capital position and its risk-mitigating practices.

On the flip side, when there are troubles in the economy, the banks will suffer. The risks to the economy are plentiful at this time. Higher interest rates, inflation, and elevated debt levels are taking their toll on TD Bank. Let’s look at TD’s most recent quarterly result as an example.

Adjusted earnings per share fell 4% to $1.94 as a result. Also, the bank’s provision for credit losses increased to $599 million from $27 million a year ago. Clearly, rising interest rates and debt levels are catching up to the consumer.

The Canadian economy decelerated sharply in the second half of 2022. In 2023, higher interest rates will continue to mean increasingly higher borrowing costs. Ultimately, this will continue to weigh on consumer spending. These are headwinds that would serve a big blow to the TSX, even the best of banking stocks like TD.

But if you’re ready to position yourself for an economic recovery, TD stock on the TSX is a good stock to buy.

The post Why These TSX Stocks Are Solid Bets on Canada’s Economic Recovery appeared first on The Motley Fool Canada.

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Fool contributor Karen Thomas owns shares of Toronto Dominion Bank.. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.

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