Market purists and academics will scoff at this, but I truly believe there’s a benefit in buying lower-priced stocks.
At first glance, it doesn’t appear to be the case. A stock’s underlying value has nothing to do with the stock price. It has everything to do with potential, earnings, the balance sheet, and so on. In other words, a stock trading at $125 with an intrinsic value of $250 is every bit as undervalued as a $1 stock with a $2 fair value.
But there are still a couple of benefits to buying lower-priced stocks. First of all, it’s easier for a stock to move from $5 to $10 than it is for a stock to move from $50 to $100. Second, you feel rich picking up 1,000 shares of a stock worth $5 versus 100 shares of a stock worth $50. Don’t discount that feeling.
Here are five cheap stocks that also offer nice yields and big upside potential.
Just Energy
Just Energy Group Inc. (TSX:JE)(NYSE:JE) has a bad reputation because its reps inevitably end up knocking on your door during dinner. The company has also cut its dividend twice in the last five years.
But today’s Just Energy is in good shape. It pays a 6% yield that’s easily covered by cash flow. Some 60% of its revenue comes from the commercial market, which really benefits from the ability to lock in electricity or natural gas rates. And two of Canada’s richest men — Jim Pattison and Ron Joyce — are the company’s largest shareholders.
TransAlta
TrasnAlta Corporation (TSX: TA)(NYSE: TAC) is one of Alberta’s largest power producers with other assets across North America. The company is struggling because Alberta has made the decision to phase out coal-fired power by 2030. Most of TransAlta’s assets in the province use coal.
But it isn’t all bad news. TransAlta is getting paid $39 million annually until 2030 as compensation, which should be enough to convert many of its plants to natural gas. The company also generates plenty of free cash flow — shares trade hands at just 5.5 times trailing free cash flow — which should improve as spot power prices increase in Alberta. Shares also yield 2.3%.
Rocky Mountain
Rocky Mountain Dealerships Inc. (TSX:RME) is Canada’s largest independent Case farm machinery dealership. The company has more than 35 dealerships and nearly 1,000 employees.
Farm machinery is a steady, albeit unspectacular business. The real appeal is the company’s exposure to the agriculture sector, which is currently booming. Farmland in the prairies has been one of the best-performing asset classes over the last two decades with little indication of slowing down.
RME shares trade hands at just 12.5 times trailing earnings and pay a 4.8% dividend yield.
Wi-Lan
Wi-Lan Inc. (TSX:WIN) is one of the most interesting companies in Canada. It acquires intellectual property rights and then goes after companies that are violating those rights. Yes, Wi-Lan is a patent troll.
There are a number of advantages to investing in a company like this, including a low correlation to the market itself. The company is also a proven winner, growing the top line from just $2 million in 2006 to more than $100 million in 2015. And with more than US$100 million in cash on the balance sheet, the company is positioned well for the future.
Shares pay a 1.25 cent quarterly dividend — good enough for a yield of 1.8%.
Plaza Retail REIT
Plaza Retail REIT (TSX: PLZ.UN) owns 7.8 million square feet of retail property spread over eight Canadian provinces. It focuses on developing new property rather than buying existing buildings.
Last year’s results were good. Adjusted funds from operations (AFFO) increased more than 5% to $0.33 per share. This puts shares at less than 15 times AFFO and gives the stock a payout ratio of less than 80%. In addition, Plaza has raised its dividend each year since 2003. Shares currently yield 5.6%.
The bottom line
Canada is filled with low-priced stocks that have nice upside potential and pay attractive yields. Don’t miss out on these opportunities before they become much more expensive.
