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Contrarian Investors: Should You Buy TransAlta Corporation or Baytex Energy Corp.?

Contrarian investors are always searching for beaten-up stocks that might be on the cusp of a big recovery.

Let’s take a look at TransAlta Corporation (TSX:TA)(NYSE:TAC) and Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) to see if one deserves to be in your portfolio.

TransAlta Corporation

TransAlta used to be a stable pick among dividend investors, but the company ran into a series of issues in recent years that forced it to slash the payout a number of times.

Investors subsequently bailed out, and the stock went into a tailspin, plunging from $20 per share in 2011 to $4 early last year.

Investors who had the courage to step in at the low have doubled their money, and more gains might be on the way.

Why?

TransAlta is doing a good job of reducing debt, and the uncertainty over the company’s future in Alberta appears to be addressed.

Alberta struck deals with coal-fired power producers last year that will see the province provide payments to help cover the costs of closing some plants and transitioning others to natural gas.

TransAlta is receiving about $37.4 million per year through 2030 to assist with its changeover.

In addition, Alberta is modifying its power market to pay producers for capacity, as well as the electricity they generate. This should provide the necessary incentive for TransAlta and other companies to invest in new facilities to replace the coal plants that are being decommissioned.

At the current stock price, investors are getting TransAlta’s assets that have not been dropped down to TransAlta Renewables (TSX:RNW) for very small part of the share price.

Baytex Energy Corp.

Baytex was also a top dividend pick up until the bottom fell out of the oil market three years ago.

Long-term investors still can’t believe the stock fell from $48 to $2 by early last year, and the rebound to the current price of $3.50 is little comfort for that crowd.

Recent investors who have stepped in below the $3 level are feeling much better.

Baytex remains volatile due to its heavy debt load, and any further downswing in oil prices could send the stock back toward $2 per share. However, the upside potential on an oil rebound is significant.

Baytex owns attractive assets, and management has done a good job of reducing costs through the downturn. Exit production is even expected to rise this year compared to 2016.

The company just needs oil prices to increase so it can generate the cash flow needed to pay down the debt and boost the capital plan.

Is one a better bet?

Buy-and-hold investors might want to go with TransAlta today. The stock isn’t likely to rocket higher, but I think a slow and steady grind to the upside is very possible.

Investors with a stomach for volatility might want to start nibbling on Baytex. You have to be an oil bull, but if you are in that camp, the upside torque on this stock could be significant if oil finds a way to rally in through the end of the year and into 2018.

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Fool contributor Andrew Walker owns shares of TransAlta.

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