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Undervalued Stocks Still Exist in This Frothy Market

It has been quite the rally since Donald Trump won the election. Many of the experts, including Warren Buffett and Prem Watsa, have become bullish of late. Buffett has loaded up on stocks and Prem Watsa, also known as the “Warren Buffett of Canada,” dumped a majority of his short positions. It appears that both men believe that the Trump Administration will give the U.S. economy a huge boost through corporate tax cuts and deregulation initiatives.

Although the Trump Rally has slowed down, I still think there’s a lot more room to run, but it’s important to be realistic with expected returns from here because the markets are definitely starting to look frothy. John Williams of the Federal Reserve Bank of San Francisco said that the market “kind of got ahead of reality” because of fiscal policy hopes.

There’s no question that valuations are steep, and it’s becoming increasingly difficult to find value, especially since earnings need to catch up for many of the companies that have rallied since the election. Many overly bullish investors have been going all-in by dumping their defensive stocks in favour of cyclical ones to maximize their upside from the rally that they believe is around the corner. Even if you’re extremely bullish, I would advise against this; defensive names should be the cornerstone of any diversified portfolio.

Instead of trying to time the market or buying and selling stocks based on the sector they’re in, look for beaten-up stocks that have gone out of favour with the general public. These names should have long-term fundamentals intact and should offer investors a significant margin of safety at the time of purchase. Although it’s getting harder to find value in the market after the Trump Rally, there are still undervalued gems that can offer you terrific long-term returns if you can spot them.

Air Canada (TSX:AC)(TSX:AC.B) and Corus Entertainment Inc. (TSX:CJR.B) are two beaten-up stocks that are dirt cheap and look to be trading at discounts to their intrinsic value.

Air Canada

Air Canada trades at an absurd 4.4 price-to-earnings multiple, which looks like a value trap, but it isn’t. The airline industry is on a cyclical upswing, and it’s expected that the company will continue its growth streak into the latter part of this year. Free cash flow is expected to soar, and the stock could be headed to much higher levels from here.

Buffett is bullish on the airline industry because it’s simply too cheap to pass on, even if it is an extremely cyclical industry.

Corus Entertainment

Corus trades at a ridiculously cheap 1.1 price-to-book multiple and a 1.5 price-to-sales multiple, both of which are lower than the company’s five-year historical average multiples of 1.5 and two, respectively.

The company offers a gigantic 8.7% dividend yield, which has gone up because the stock plummeted by over 60% peak to trough. However, despite having an artificially high yield, I believe the company will keep its dividend intact because it is extremely shareholder friendly and hasn’t cut its dividend over the last decade, even during the Financial Crisis.

The cable business has gone out of favour, but I think the management team has what it takes to get things back on track. The stock won’t rebound overnight, but you can collect that huge yield while you wait.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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