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.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. 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).
A customer using their phone to access internet services provided by the company.
Tucows Inc. (NASDAQ:TCX), headquartered in Toronto, Canada, is a provider of internet services, including domain registration, mobile services, and fiber network solutions. The company has demonstrated strong fundamentals, supported by consistent revenue and margin growth across its segments. For the first quarter of 2024, Tucows Inc. (NASDAQ:TCX) reported a year-over-year revenue increase of 8.7% to $87.5 million, driven by its three core businesses: Wavelo, Ting, and Domains.
The Wavelo segment, which manages telecom services, saw substantial growth, with revenues rising 28.6% year-over-year, contributing significantly to the company’s adjusted EBITDA growth of 38.7% to $4.2 million. Meanwhile, the Ting fiber business reported strong subscriber additions, up 25.6%, highlighting its expanding footprint in small towns with fast internet services. Tucows Inc. (NASDAQ:TCX) long-established domain registration business continues to provide stable cash flow, with Domain Services revenue increasing 4.5% to $61.9 million. This solid performance supports Tucows Inc. (NASDAQ:TCX) strategy of reinvesting profits into higher-growth opportunities, such as fiber and Web3 ventures.
Despite macroeconomic headwinds, Tucows Inc. (NASDAQ:TCX) is well-positioned for long-term growth, particularly in fiber infrastructure and telecom services, which remain attractive investment areas. The company’s focus on capital-light, cash-generating businesses, along with its emphasis on scaling through subscription models, reflects its strong fundamentals and future growth potential.
Donville Kent Asset Management made the following comment about Tucows Inc. (NASDAQ:TCX) in its second quarter 2023 investor letter:
“We published our report on Tucows Inc. (NASDAQ:TCX) in our April newsletter and the stock is up ~75% off the bottom that month.7 That being said, it is currently trading around $40/share and we strongly believe it is worth $100/share. ? The stock actually declined ~14% in June and has since recovered most of that decline. The reason for the temporary downturn seems to be the US Government announcing their $42.5B BEAD program. ? “The federal government has allocated nearly $42.5 billion to expand broadband connectivity across the United States, a move that could spell a windfall for broadband equipment and service providers.” ? Tucows will be able to participate in these funding programs and it appears like the stock sold off on the headline of this program with people not understanding the full extent of what it meant. ? We recommend reading the article posted by SDX Central, which can be found in the footnotes.”
Overall TCX ranks 4th on our list of the best Canadian stocks to buy according to Wall Street Analysts. While we acknowledge the potential of TCX 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 TCX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
