Markets are trading at new highs, but contrarian investors can still find a few beaten-up names that offer some big upside potential in the near term.
Let’s take a look at TransAlta Corporation (TSX: TA)(NYSE: TAC), Baytex Energy Corp. (TSX: BTE)(NYSE: BTE), and Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM) to see why they might be interesting picks.
TransAlta
A combination of high debt, falling power prices, and opposition to coal-fired power plants hit TransAlta hard in recent years and forced the company to slash its dividend a number of times.
After bottoming out near $4 per share early last year, TransAlta’s fortunes have started to improve, and the stock is now close to $8.
A deal signed with Alberta has cleared up most of the concerns over TransAlta’s future in the province. Alberta will pay TransAlta more than $37 million per year through 2030 to help cover the costs of transitioning its plants away from coal.
Some pundits say TransAlta is an attractive value play because its market capitalization is close to the value of its ownership position in TransAlta Renewables.
Baytex
Baytex made a large purchase just before oil prices began their extended decline. As a result, the company found itself with too much debt and not enough cash flow to cover its dividends.
The former monthly payout of $0.24 per share was eliminated, and Baytex saw its share price fall from $48 to just $2 at the low last year. The stock has since been volatile, moving with the oil market, and currently sits at $3.25 per share.
Baytex has calculated its net asset value to be at least $9 per share, so there is some nice upside potential if oil can extend its recent recovery.
CIBC
Investors are concerned CIBC is too exposed to the Canadian housing market, and that’s why the stock is trading at a large discount to its peers.
A total meltdown in house prices would certainly be negative, but most analysts expect to see a gradual pullback, and CIBC’s mortgage portfolio is capable of handling a reasonable decline in the market.
The company recently raised the dividend, so management can’t be too concerned about the revenue or earnings outlook.
The stock has come off the 2017 lows but still trades at 10.3 times trailing earnings compared to P/E ratios of 12 or higher for its larger competitors.
The dividend provides a yield of 4.6%.
The bottom line
Contrarian investors can still find deals in the current lofty market.
