Yahoo Finance Interest Rate Cuts Could Boost Returns for These 3 TSX Stocks
Written by Chris MacDonald at The Motley Fool Canada
Like most other economies in the world, Canada is also closely watching the interest decisions made by central banks around the world. Indeed, the Bank of Canada has thus far been a leader in lower interest rates for the domestic economy, a move made to respond to inflation, which has hit 2% and appears to be stabilizing faster than the rate of many global peers.
These interest rate cuts will certainly affect different sectors of the market differently. That’s just a reality. But for companies in higher-growth areas of the economy, or those with higher debt burdens and require new capital to continue to grow (via acquisitions), the benefits can be outsized.
Here are three growth stocks I think can benefit most from more incoming rate cuts from the Bank of Canada.
Constellation Software
Constellation Software (TSX:CSU) continues to be among my top growth picks for investors looking to put some capital away for the long term. The company’s growth-by-acquisition model has proved to be very fruitful over the long term, as the chart below shows. The software maker has continued to diversify into various verticals in the software market, acquiring hundreds of smaller software firms and improving their returns over time, delivering excellent results to shareholders over this period.
This reality, in which Constellation continues to grow at a rapid rate, requiring the use of debt to fund some of its acquisitions, means lower interest rates are a very good thing for CSU stock. From a valuation perspective, investors will adjust their models with a lower discount rate, likely leading to higher potential multiples over time (this catalyst holds true for the other two stocks on this list as well). But acquisition costs will also decrease, bringing about higher potential profitability and another key valuation lever that can be pulled to deliver investors even higher returns over time.
Shopify
Shopify (TSX:SHOP) has undoubtedly been one of the best-performing growth stocks on the TSX for a very long time. However, since the company’s pandemic tailwinds have abated, this is a stock that’s certainly lagged behind many of its growth peers, and higher interest rates have not helped on the valuation front.
For investors in Shopify, lower interest rates are much more impactful from a valuation perspective. This is a company that’s consistently stayed away from debt and focused on reinvesting its cash flows into its core business. That’s a strategy that’s certainly paid off nicely over time – and one that many investors continue to believe should deliver outsized returns over the long term.
For those bullish on the long-term secular growth trends underpinning the e-commerce space, and who want stocks with outsized exposure to valuation growth over time, Shopify is a company to consider at current levels, in my view.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is another acquisition-heavy giant that can see a real and meaningful boost from lower interest rates. The company’s acquisition model is focused on purchasing high-quality chains of convenience stores and gas stations, rolling these targets under its core banners.
This is a global growth strategy – and one that has paid off over the very long term. The convenience retailer has tried to make a bigger push into retail in the past, and its potential 7-11 acquisition does appear to be dead. But these two deals do indicate the kind of size and scale Couche-Tard is aiming for. The company isn’t making the kinds of small deals it once was; this is a company that wants to supercharge its growth long-term. In order to move the needle, it’s going to need to borrow a lot more money. Indeed, borrowing that capital at lower rates would be very beneficial for investors over time.
The post Interest Rate Cuts Could Boost Returns for These 3 TSX Stocks appeared first on The Motley Fool Canada.
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Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alimentation Couche-Tard and Shopify. The Motley Fool recommends Constellation Software. The Motley Fool has a disclosure policy.
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