We recently compiled a list of the 10 Oversold Canadian Stocks to Buy Right Now. In this article, we are going to take a look at where Magna International Inc. (NYSE:MGA) stands against other oversold Canadian stocks.
Ratings agency S&P Global believes that Canada’s economy has been performing slightly better than it forecasted a quarter ago, but still remains subdued. The company projects GDP growth of 1.2% in 2024 before accelerating to 2.0% in 2025. The firm went on to say that the Bank of Canada (BoC) is expected to cut interest rates to 3.75% by year-end 2024 and 2.50% in 2025.
It expects that the rebound in economic growth should stem from fixed investment–both residential and non-residential—instead of consumer spending. The monetary easing cycle that kicked in June might help flip investment outlays from contraction last year to expansion. TD Economics believes that consumer spending is expected to undergo a period of below-trend growth through 2026, as households in Canada save more amidst increased mortgage debt. Business investment might grow above the trend. The need to establish more homes should result in increased residential investment, and the opportunity to fast-track the clean energy transition might boost investments in structures, machinery, and equipment.
What To Expect in Q4 2024 from BoC?
On 4th September, the BoC decreased the overnight interest rate by 25 bps for a 3rd consecutive meeting, as was widely anticipated by the broader market. However, the ratings agency believes that the current policy rate remains relatively restrictive in comparison to the longer-run estimate of neutral and against a backdrop of economic growth which is below potential.
Following the September meeting, there were hints at further cuts. This means that the central bank has pivoted its focus to downside risks to the economic growth outlook, with inflation now slowing down. BoC governor highlighted that policymakers are required to safeguard against the risk that the economy is too weak and inflation declines too much. As per the ratings agency, the higher unemployment, together with persistent decreases in per-capita GDP, should help push inflation lower. The company expects core consumer price index (CPI) growth of 2.0%-2.5% over the next 12 months but with risks of undershooting 2.0%. Notably, potential rate cuts are expected to cause mortgage-fueled inflation to decline sharply for the remainder of the year.
Understanding Canada’s Labor Market Dynamics
The ratings agency believes that the underlying trend since May has been weaker hiring and increased unemployment. The cumulative lagged effect of increased interest rates is expected to continue to weigh on consumers. Despite BoC starting an easing cycle, borrowing costs are expected to remain much higher over the next 2 years than COVID-19 pandemic lows. This is because of the mortgage renewal system in Canada. Several homeowners are expected to see interest payments as a share of income rise in the upcoming 5-year mortgage renewals over 2025 and 2026, relative to 2020-2021 contracts.
The ratings agency also added that the Labor Force Survey (LFS) measure of wage growth was 5.0% YoY in August. The BoC’s preferred measure i.e., quarterly earnings, hints at a 3.8% YoY increase in total hourly compensation in Q2, with a finer breakdown showing only a 2.9% rise in the business sector as compared to the longer-run average of 3.4%. However, productivity growth is running well behind wage growth, which is inconsistent with 2% inflation.
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Our Methodology
To list the 10 Oversold Canadian Stocks to Buy Right Now, we used the Finviz screener and online rankings to extract the Canadian companies. After getting the list of 25-30 stocks, we selected the ones trading lower than the forward P/E of ~15.0x and which have significantly declined over the past year. Finally, the list was narrowed down to the following 10 Canadian stocks and these were ranked in ascending order of their hedge fund sentiments, as of Q2 2024.
Why are we interested in 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).
Magna International Inc. (NYSE:MGA)
% Decline Over Past Year: ~18%
Forward P/E (As of October 21): 6.61x
Number of Hedge Fund Holders: 16
Magna International Inc. (NYSE:MGA) is engaged in designing, engineering, and manufacturing components, assemblies, systems, and modules for original equipment manufacturers of vehicles and light trucks.
Magna International Inc. (NYSE:MGA) has been tightening its adjusted EBIT margin range for 2024 and remains focused on addressing market changes, targeting continued margin expansion and robust FCF by 2026. Market experts believe that operational excellence activities should contribute to margin expansion. Magna International Inc. (NYSE:MGA) has been restructuring its complete vehicle cost base and has plans to reduce engineering spend. Therefore, it expects strong FCF and margin expansion for 2026 amidst challenges.
Magna International Inc. (NYSE:MGA) has been exploring opportunities to offset the impact of declining EV programs. It is going for a conservative approach to EV programs in North America based on historical data and judgment. While Magna International Inc. (NYSE:MGA) remains optimistic about its value proposition with Chinese automakers expanding globally, it remains committed to maintaining a leverage ratio and will consider share buybacks post addressing balance sheet commitments.
Magna International Inc. (NYSE:MGA)’s proactive measures in the face of the evolving EV market and its commitment to operational excellence and capital discipline place it well to tackle current uncertainties. For FY 2024, the company expects an adjusted EBIT margin of 5.4% – 5.8% and an adjusted net income of $1.5 billion – $1.7 billion. Aristotle Capital Management, LLC, an investment management company, released its second-quarter 2024 investor letter. Here is what the fund said:
“Magna International Inc. (NYSE:MGA), a Canada‐based global auto parts, systems and assembly company, was one of the largest detractors for the period. The company lowered its 2024 sales guidance, having seen a slowdown in electric vehicle (EV) adoption across its customer base and expecting a halt in Fisker Ocean production. Despite concerns over automakers delaying EV rollouts, we continue to believe in the longer-term investment catalysts for Magna. These include the company’s ability to enhance margins from operational improvements and leverage its distinctive capabilities to supply parts for an increasingly electrified and autonomous fleet of vehicles. Magna specializes in lightweighting—a necessity for heavy internal combustion engines and electric vehicles—and has made years of investments in self-driving technologies. In addition, with leading market share positions in many of its core markets and products, we believe Magna remains well positioned to benefit as content‐per‐ vehicle increases and automotive parts and systems become more complex.”
Overall MGA ranks 3rd on our list of 10 Oversold Canadian Stocks to Buy Right Now. While we acknowledge the potential of MGA as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than MGA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.