Written by Daniel Da Costa at The Motley Fool Canada
With interest rates nearing their peak this year as inflation has rapidly cooled off, policymakers are still hopeful that the economy can experience a soft landing. If that’s the case, the market could rebound and begin to rally sooner than expected, lifting the valuations of all stocks, especially high-quality growth stocks that are trading ultra-cheap in this environment.
Growth stocks have been some of the hardest-hit stocks in this environment for several reasons.
First off, higher interest rates not only make it more difficult for a lot of these companies to fund their growth, but they also make dividend stocks and bonds more attractive, causing growth stocks to fall significantly in value.
In addition, in this uncertain environment, many investors are looking to shore up their portfolios and buy more reliable and defensive stocks rather than higher-risk growth stocks.
Another reason is that prior to a market downturn, many of these growth stocks trade with significant premiums. So as uncertainty picks up and their growth potential slows down in a worsening economy, naturally, their valuations are impacted more significantly than stocks that didn’t have as much of a premium.
Therefore, since growth stocks are some of the cheapest companies on the market today, they’ll inevitably have some of the best recoveries as the market rebounds.
And even if we don’t get a soft landing, economic cycles are natural, so eventually, there will be a recovery and a bull market to follow.
Therefore, while you can buy high-quality growth stocks at ultra-cheap valuations, they’re some of the best investments to make. And while there are numerous stocks trading undervalued today, here are three of the best to consider buying now.
One of the top residential REITs in Canada
Although some growth stocks are certainly riskier than others, there are some that are reliable, such as a residential real estate stocks like InterRent REIT (TSX:IIP.UN). IIP.UN still trades undervalued and could rally significantly in a bull market.
With rapidly rising interest rates over the last year and a half, it has become more expensive for InterRent to operate its business, especially considering it’s consistently investing in growth.
The REIT is constantly looking to add new properties to its portfolio, or invest in its existing properties to increase their value and the income that they can generate.
Therefore, while this stock trades off its highs, and without such a significant growth premium, it’s one of the best to buy now.
Over the last five years, InterRent’s average forward price-to-adjusted funds from operations (P/AFFO) ratio was 31.5 times. Today, however, it trades at a P/AFFO ratio of just 25.5 times.
Plus, when the economic environment improves, its earnings are expected to jump significantly, bringing its valuation down even more, which is why it’s one of the best growth stocks to buy now.
Two impressive growth stocks to buy and hold for the long haul
Canadian Tire (TSX:CTC.A) has always been a popular retailer in Canada and one of the best-known brands. However, in recent years, it has really begun to show what a high-quality company it can be, and how much growth potential it has.
It even performed exceptionally well through the pandemic, when many of its retail competitors struggled.
In the current environment, though, the stock is being temporarily impacted. Therefore, while you can buy it ultra-cheap, it’s one of the best investments you can make today.
Analysts expect that by 2025 it will be able to generate normalized earnings per share of more than $20.
And considering that over the last 10 years, it averaged a forward price-to-earnings (P/E) ratio of 12.8 times. If Canadian Tire could reach that valuation again as both the market and economy recovered, its share price could climb to more than $250.
goeasy (TSX:GSY) is another impressive stock that’s trading dirt cheap today. After growing its sales by more than 110% over the last five years, investors are now worried that the current economic environment could impact profitability.
So far, however, the specialty finance company has continued to prove how robust its loan book is and kept its charge-off rates in line with targets.
Therefore, while it trades at a forward P/E ratio of just 7.4 times, it’s easily one of the best growth stocks to buy today.
The post A Bull Market Is Coming: 3 Growth Stocks That Could Thrive appeared first on The Motley Fool Canada.
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