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Why This TSX Stock Could Be 1 of the Best Additions to Your TFSA

Vineet Kulkarni
IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT

As economies re-open after weeks-long lockdowns, many TSX stocks are seeing sharp rebounds. Retail and restaurant stocks took the lead, and some of them even doubled in the last three months.

However, the apparel makers Canada Goose (TSX:GOOS)(NYSE:GOOS) and Gildan Activewear (TSX:GIL)(NYSE:GIL) have been relatively slow to recover. They are up almost 45% and 35% in the same period, respectively. Investors had expected much steeper rally for these names amid lockdowns easing.

TSX stocks: Canada Goose or Gildan Activewear?

An outdoor apparel maker, Canada Goose exhibited superior revenue growth in the last three years, notably beating the industry trends. However, COVID-19 is expected to be an inevitable hitch for it at least this year.

Interestingly, last quarter’s results showed that the company is better placed to weather the crisis and exceeded expectations. Its geographically diversified revenue base makes its top line relatively stable.

Moreover, Canada Goose’s expansion into direct-to-consumer sales with both online platforms and with brick-and-mortar stores has worked out pretty well. Continued efforts on the same front will probably accelerate its earnings growth further.

Gildan Activewear is a low-cost apparel maker and manufactures everyday basic apparel, including activewear, socks, hosiery, and legwear products. Though Gildan and Goose are into apparel making, they are not direct competitors due to their distinct product ranges.

Gildan reported big earnings decline in the first quarter, and it expects a significant impact on its second-quarter results. It has a strong balance sheet, and its solid liquidity position will likely make it through the crisis. But analysts estimate that Gildan will take a bigger dent on its bottom line for the calendar year 2020 as compared to Goose.

Market performance and valuation

In the last three years, Canada Goose stock has remarkably outperformed Gildan stock. If one had invested $10,000 in GOOS three years ago, they had accumulated over $15,000 today. The same would have turned $6,200 with Gildan stock.

Gildan last year paid handsome dividends, with an annualized yield of almost 4%. However, the company announced a suspension of dividends amid the deteriorating financial situation due to the pandemic.

Interestingly, Canada Goose stock looks trading at a discounted valuation against Gildan Activewear. GOOS is currently trading 38 times its 2020 earnings estimates, close to its average historical valuation. Thus, its attractive valuation and strong position to weather the crisis might push the stock higher.

Canadians have one of the most flexible investment options in the form of a Tax-Free Savings Account (TFSA). Dividend or capital gains generated within the TFSA are tax-free throughout the holding period and even at the time of withdrawal. The TFSA contribution limit for 2020 is $6,000.

I think Canada Goose is a relatively better bet for investors due to its attractive growth prospects. The stock also looks attractive because of its relative discounted valuation. Its aggressive expansion plans, especially related to omnichannel direct-to-customer sales, will likely accelerate its growth, which will make up for the lost time.

The post Why This TSX Stock Could Be 1 of the Best Additions to Your TFSA appeared first on The Motley Fool Canada.

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Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Canada Goose Holdings. The Motley Fool recommends GILDAN ACTIVEWEAR INC.

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