According to the report Economic Outlook Canada Q4 2024 by S&P Global on September 24, Canada’s economy has been showing signs of improvement recently, but the growth is expected to remain below the country’s potential. The country’s GDP growth is expected to be 1.2% in 2024, which is a modest increase from the previous year. However, this growth rate is still short of the country’s potential growth rate of 1.8%, indicating that the economy is not growing at its full capacity.
The labor market also shows signs of softening, with weaker hiring and rising unemployment. This is a cause for concern, as a strong labour market is essential for driving economic growth. The unemployment rate is expected to rise to 7% by the end of 2024 before falling in 2025. This increase in unemployment will likely have a ripple effect on the economy, as higher unemployment rates can lead to reduced consumer spending and decreased economic activity.
Another area of concern is the relationship between wage growth and productivity growth. Wage growth is currently outpacing productivity growth, which is inconsistent with the 2% inflation target. This means that wages are increasing at a faster rate than the rate at which workers are producing goods and services. This can lead to higher production costs and reduced competitiveness for Canadian businesses.
Despite these challenges, the Bank of Canada (BoC) is shifting its focus to downside risks to the economic growth outlook. The BoC has already cut interest rates for the third consecutive time in an effort to stimulate the economy. Further interest rate cuts of 25 basis points are expected in the fourth quarter and January. These interest rate cuts are intended to make borrowing cheaper and encourage businesses and consumers to invest and spend.
The recovery in 2025 is expected to be driven by fixed investment, particularly residential and non-residential investment. This is a positive sign, as fixed investment is an important driver of economic growth. However, consumer spending is expected to remain subdued due to the effect of higher interest rates. Higher interest rates can make borrowing more expensive, reducing consumer spending and slowing economic growth.
Another key factor that will impact the economy is changes to immigration policies and their effectiveness. Immigration has been an important driver of economic growth in Canada, as it brings in new workers and skills to the labor market. However, changes to immigration policies can impact the number of immigrants coming to Canada and their ability to contribute to the economy.
Canada’s Economy Poised to Catch Up with US
James Orlando, a senior economist at TD Bank, is bullish on Canada’s economic growth prospects, particularly in the wake of the Bank of Canada’s recent interest rate cuts. He believes that this change in interest rate policy could be the catalyst that helps Canada close the economic growth gap with the United States. For years, Canada’s economic growth has trailed behind that of the US, but Orlando thinks that the rate cuts could be the turning point.
According to Orlando, the Canadian economy is highly sensitive to interest rate fluctuations, especially in the housing market. With a high level of debt and a reliance on variable-rate mortgages, Canadians are particularly vulnerable to changes in interest rates. However, with the recent rate cuts, Orlando expects to see a surge in investment in the housing market, which could lead to improved affordability. Orlando is confident that the rate cuts will stimulate economic growth and create new job opportunities.
The Canadian economy is also poised to benefit from increased investment in key areas such as the green transition and electric vehicle production. With a growing population and a need for more housing, Orlando anticipates a significant increase in investment in the housing market and other sectors. As the economy continues to grow, Orlando expects to see a rise in consumer spending, which will further fuel economic growth. While challenges still lie ahead, Orlando is optimistic that the Bank of Canada’s rate cuts and the resulting economic stimulus will drive growth and create jobs in the Canadian economy.
Canada’s economy is expected to experience modest growth in the coming years, driven by fixed investment and a soft labor market. With that in context, let’s take a look at the 7 cheap Canadian stocks to invest in.
Photo by Rachael Annabelle on Unsplash
Our Methodology
To compile our list of 7 cheap Canadian stocks to invest in, we used the Finviz and Yahoo stock screeners to find the largest Canadian companies. From that list, we screened for companies that are trading at a forward P/E ratio of under 20 as of September 28. We then narrowed our choices to 7 stocks according to analyst upside potential. The list is sorted in ascending order of their upside potential as of September 28.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Cheap Canadian Stocks To Invest In
7. Toronto-Dominion Bank (NYSE:TD)
Upside Potential: 3.23%
Forward P/E Ratio as of September 28: 10.78
Number of Hedge Fund Investors: 22
Toronto-Dominion Bank (NYSE:TD), also known as TD Bank, is one of the largest banks in Canada and offers a wide range of financial services in Canada and the U.S.
In Q3, Toronto-Dominion Bank (NYSE:TD) reported adjusted earnings of $3.6 billion, revenue up 10% year-over-year (YoY) and 3% quarter-over-quarter (QoQ), indicating that its core business is still growing despite headwinds. The bank’s net income for the quarter was $1.87 billion, up 13% YoY, driven by strong revenue growth in its Canadian Personal and Commercial Banking segment. The segment’s revenue increased by 9% YoY to $5.00 billion, primarily driven by volume growth and higher margins.
Toronto-Dominion Bank’s (NYSE:TD) Wholesale Banking segment also performed well, with net income increasing by $45 million to $317 million, despite high provisions for credit losses (PCLs). The segment’s revenue increased 8% YoY to $1.43 billion, driven by higher trading revenue and fees.
The bank’s strategic acquisitions of Cowen and First Horizon have helped it expand its footprint across the U.S. and strengthened its position in the American market. Furthermore, Toronto-Dominion Bank (NYSE:TD) has a long history of paying consistent and growing dividends, with a 5-year dividend growth rate of 7.3%. The dividend yield of around 4.5% to 5% at the current price makes it an attractive option for income-focused investors.
Toronto-Dominion Bank (NYSE:TD) is trading 10.78 times its earnings, a 9.81% discount compared to the sector median of 11.95. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $64.97, which represents a 3.23% upside potential from its current level.
6. Imperial Oil (NYSE:IMO)
Upside Potential: 8.33%
Forward P/E Ratio as of September 28: 10.61
Number of Hedge Fund Investors: 18
Imperial Oil (NYSE:IMO) is a prominent player in Canada’s energy industry, with a diverse range of operations spanning exploration, production, refining, and petroleum product distribution. As a majority-owned subsidiary of ExxonMobil, the company plays a significant role in the country’s oil sands sector.
Imperial Oil (NYSE:IMO) has made significant strides in reducing its environmental impact, particularly with the launch of its Grand Rapid project in May. This innovative project utilizes solvent-assisted technology to produce oil at its Cold Lake site in Alberta, resulting in a reduction of greenhouse gas emissions by up to 40%. This achievement brings the company closer to its goal of decreasing oil sands emissions by 30% by 2030. The Grand Rapid project is expected to produce 15,000 barrels of oil per day.
In addition to the Grand Rapid project, Imperial Oil (NYSE:IMO) is also expanding its Cold Lake oil sands facility through the Leming redevelopment, set to commence in 2025. Once operational, this project will increase production by 9,000 barrels per day and produce 20,000 barrels per day of diesel from local green sources, further solidifying the company’s commitment to sustainability.
Imperial Oil (NYSE:IMO) has been capitalizing on higher crude oil prices and has been increasing its operational efficiency in recent years. Imperial Oil (NYSE:IMO) is trading 10.66 times its earnings, a 5.42% discount compared to the sector median of 11.22. The company’s earnings are expected to grow by 4.26% this year. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $74.65, which represents an 8.33% upside potential from its current level.