In the ever-evolving landscape of investment opportunities, keeping an eye on the broader economic environment can be as crucial as analyzing individual stocks. As we delve into the best Canadian stocks to buy, it’s important to consider the country's current economic outlook. Canada's economic environment reveals a complex mix of challenges and potential opportunities. The global economy is still reeling from historically high inflation, which has triggered the most aggressive monetary tightening in decades. While the U.S. economy has demonstrated an unexpected resilience, balancing robust growth with moderating inflation, Canada's situation requires closer scrutiny. The Canadian economy, though strong in many respects, is particularly sensitive to interest rates. High levels of household debt and relatively short mortgage terms amplify the effects of rising interest rates, making Canadian consumers and businesses more vulnerable compared to their U.S. counterparts. Nevertheless, the latter part of 2023 showed unexpected economic strength, buoyed by record immigration and positive spillover from a resilient U.S. economy, leading to a significant easing of recession fears in Canada.
Yet, the Canadian economy is not entirely out of the woods. Growth is anticipated to remain below trend in 2024, with the Bank of Canada forecasting a modest GDP increase of 1.25% to 1.5%. This slowdown is partially attributed to Canada’s distinct economic vulnerabilities. For instance, productivity growth has been alarmingly weak, with Canada’s senior deputy governor labeling it as an “emergency”. This decline is largely due to insufficient business investment in key areas such as equipment and intellectual property, compounded by limited competition in essential sectors like telecommunications and banking. On a positive note, this slower growth is expected to ease inflationary pressures. Headline inflation has been gradually decreasing, and core inflation, which excludes volatile food and energy prices, is moving closer to the Bank of Canada’s target range. This scenario provides the Bank with some flexibility, with expectations for a 50-75 basis point reduction in interest rates later this year.
Despite strong job creation, particularly a notable surge in April 2024, employment growth of 2.0% over the past year has not kept pace with the 3.4% rise in population. This disparity has pushed the unemployment rate up by nearly a full percentage point to 6.2%, and it is projected to remain high through the rest of this year before beginning to decline in 2025. Wage growth, which averaged 5.3% in 2023, has decelerated to 3.9% (annualized) in the first quarter of 2024. With inflation pressures easing, this slower wage growth is expected to continue through 2024 and into the following year. Although the Bank of Canada’s decision to cut its policy rate is a step in the right direction, Canadian households remain the most indebted in the G7. The interest rate hikes since 2022 have strained household finances, resulting in a decline in real consumer spending per capita over five of the last seven quarters as more income is diverted towards servicing mortgage and loan interest payments.
The housing market has felt these effects more acutely. Real residential investment per capita dropped by 22.8% in the first quarter of 2024 compared to two years earlier. Looking forward, consumer spending and residential investment are expected to recover as lower interest rates stimulate demand. However, with low consumer confidence, hesitation to make significant purchases, ongoing housing affordability issues, and elevated savings rates, the pace of recovery in the latter half of 2024 is likely to be slow. Deloitte forecasts that more substantial improvements in consumption and residential investment will occur next year as confidence improves. Overall, Canada's economy performed better in the first half of 2024 than expected, but this strength is projected to be counterbalanced by slower real GDP growth in the latter part of the year due to reduced household spending. The updated forecast anticipates real GDP growth of 1.2% for 2024, accelerating to 2.6% in 2025. On a per-capita basis, real GDP is expected to decline by 1.6% this year before rebounding to 1.1% growth in 2025.
For investors looking to capitalize on these evolving conditions, understanding the underlying economic indicators and trends is essential. With this context, we now turn to a detailed examination of the best Canadian stocks to buy according to Wall Street analysts.
Our Methodology
For this article we first used a stock screener to identify Canadian stocks that analysts see material upside to, as of September 9. From this list we chose 10 stocks that have the highest upside potential from their current price based on average analyst price targets.
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A wide angle view of a factory floor, showcasing the company's engineering prowess.
Westport Fuel Systems Inc. (NASDAQ:WPRT) presents an impressive upside potential of 138%, with analysts setting an average share price target of $13.21. The company is based in Vancouver, Canada and is a leading provider of alternative fuel systems for transportation. It engineers and manufactures innovative fuel systems that allow vehicles to run on alternative fuels like natural gas and liquid petroleum gas (LPG), helping reduce carbon emissions in the transportation sector. Westport Fuel Systems Inc. (NASDAQ:WPRT) operates through key segments, including Original Equipment Manufacturers (OEM), Independent Aftermarket (IAM), and Corporate, which enable the company to cater to both vehicle manufacturers and end consumers seeking greener fuel options. The company’s partnership with Volvo Group through a joint venture, focused on its High-Pressure Direct Injection (HPDI) 2.0 fuel system, is a major strategic highlight. This collaboration is aimed at commercializing HPDI technology for heavy-duty trucks and off-road vehicles, which represents a massive growth opportunity as the transportation industry pivots towards decarbonization. Volvo's investment in this JV, amounting to $28 million with an additional earnout potential of up to $45 million, underscores the value and potential of Westport's technology.
Westport Fuel Systems Inc. (NASDAQ:WPRT) financial performance in Q2 2024 reflects improved margins and operational efficiencies. Gross margins increased from 17% to 21% year-over-year, driven by cost-cutting initiatives and stronger sales in key areas like LPG fuel systems. Additionally, the company’s strategic restructuring into five business segments, including HPDI JV, Light-Duty, and High-Pressure Controls and Systems, provides greater transparency and aligns its operations with long-term growth objectives. With a pipeline of business opportunities, particularly in the hydrogen and clean energy markets, Westport Fuel Systems Inc. (NASDAQ:WPRT) is well-positioned for future growth. The company’s expertise in fuel containment and pressure management components for both hydrogen and natural gas makes it a key player in the clean energy revolution. As hydrogen-powered vehicles gain traction, Westport Fuel Systems Inc. (NASDAQ:WPRT) is poised to benefit from its early mover advantage and strong partnerships in the industry.
Overall WPRT ranks 6th on our list of the best Canadian stocks to buy according to Wall Street Analysts. While we acknowledge the potential of WPRT to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WPRT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
