With the TSX Composite flirting with all-time highs, many value investors are down in the dumps. There just aren’t very many cheap stocks out there.
These investors have a couple of choices, neither of which sound very appealing. They can either plug their nose and buy expensive stocks or sit on the sidelines and take 1-2% annually on ultra-safe fixed-income options, keeping that cash available for when the market crashes.
There’s also a third option. Investors can focus their attention on the parts of the market that are cheap. These stocks certainly exist. They’re just a little harder to find.
Here are five of Canada’s cheapest value stocks, all trading under $10 per share.
Yellow Media
A month ago, Yellow Media Ltd. (TSX:Y) was trading at more than $17 per share. It released disappointing fourth-quarter earnings (including a massive write-off of intangible assets), and the stock promptly fell more than 50%.
There’s no way this stock should only be trading at $8.30 per share. Yes, the Yellow Pages are dying. But the company’s digital revenues currently account for 71% of the total top line, and the customer decline has pretty much stopped. It ended 2016 with 241,500 customers after starting the year with 245,000.
Shares are incredibly cheap on a free cash flow basis too. Free cash flow in 2016 was $94.6 million. The company’s market cap is currently $238.4 million. Shares trade hands at just 2.5 times free cash flow.
Canaccord Genuity
Despite rallying some 20% since I last highlighted the stock, Canaccord Genuity Group Inc. (TSX:CF) is still cheap at $5.41 per share.
The company has followed a very similar pattern over the last decade. When the materials or energy sectors decline, so does its stock. It then rallies when those sectors pick up. Canaccord is one of the biggest underwriters for these two sectors when they issue stock, so the relationship makes sense.
Canaccord Genuity also has a rock-solid balance sheet and still trades considerably under its book value. And remember, it earned $0.39 per share just a couple of years ago.
TransAlta
I value TransAlta Corporation (TSX:TA)(NYSE:TAC) using a simple formula.
It owns 64% of TransAlta Renewables, a drop-down company it spun out in 2013. Based on Renewables’s market cap of $3.36 billion, the TransAlta stake alone is worth $2.15 billion.
What’s TransAlta’s current market cap? $2.10 billion. Investors are getting TransAlta’s legacy assets for free. Remember, those legacy assets did spin off considerable free cash flow in 2016 and will continue to do so indefinitely after being converted to natural gas.
Baytex
Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) shares have sunk some 30% in just a few months as crude oil’s outlook has weakened, dropping to $4.51. When oil comes back, Baytex shares should shoot much higher. Remember, Baytex traded for $20 per share in early 2015, when oil was $60 a barrel.
In the meantime, the company is doing a nice job cutting costs and expanding production capacity in Texas. It also doesn’t have to worry about any major debt maturities until 2021.
Bombardier
Yes, Bombardier, Inc. (TSX:BBD.B) has some major warts. Its balance sheet is hurting. It has a history of missing important deadlines. And it has even tapped both the Quebec and federal governments for some very favourable cash.
But one important fact remains. If things continue to improve, Bombardier could be much higher a few years from now. During its most recent Investor Day, Bombardier’s management told investors it wants to increase revenue by more than 50% by 2020 and deliver up to US$2 billion in earnings before interest and taxes. If it can do that, today’s share price of $2.09 will likely look like a major missed opportunity.
The bottom line
There are certainly issues with all of these stocks. That’s a reality of buying value stocks, especially in today’s bull market. All five of these companies have compelling risk/reward profiles — something that can’t be said about the majority of stocks today.
