2 Top Stocks to Own in 2018

National Bank of Canada (TSX:NA) and Peyto Development and Exploration Corp. (TSX:PEY) are both undervalued with catalysts expected to drive the shares higher in 2018.

| More on:
win

It is looking like 2018 will be a year of higher interest rates, lower consumer spending, global investment in infrastructure, and possibly higher oil and gas prices.

So, to this effect, my top picks for 2018 focus on financials, infrastructure, and energy names.

Here are two of those picks:

National Bank of Canada (TSX:NA)

Of the large Canadian banks, National Bank has the most upside in terms of efficiency gains in 2018. The bank is admittedly starting from a much weaker point than many of the other banks, but nevertheless, ROE at National Bank is set to increase a full 300 basis points in 2017.

In the third quarter, National Bank reported earnings per share of $1.39 compared to expectations of $1.30, exceeding expectations by a healthy margin.

With cost savings of $135 million expected in 2017 and $155 million in 2018, the bank is embarking on a company-wide efficiency improvement plan that should support any longer-term plans to diversify outside Quebec, which currently accounts for approximately 60% of its revenues.

And with capital ratios and efficiency ratios all increasing at the bank, investors have already picked up on the improvement and opportunity for the shares.

Year to date, National Bank’s shares have risen 16.7%, which compares to a 3.5% rise for Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) shares, and a 7.5% rise for Toronto-Dominion Bank (TSX:TD)(NYSE:TD) shares.

Peyto Exploration and Development Corp. (TSX:PEY)

Where natural gas prices will trade in the coming year is unclear. There is certainly no shortage of bears, who are mostly citing record production levels.

But two things have peaked my interest. First is the fact that natural gas storage is below the five-year average, which is traditionally very bullish for natural gas prices. Second is that forecasts are calling for a very cold winter in Canada.

One thing is very clear: Peyto is a high-quality name that deserves our respect. As the lowest-cost intermediate natural gas producer, Peyto is very well positioned to reap the rewards of strengthening natural gas prices.

Peyto’s shares currently yield 8.55%, and with a simple payout ratio of 40% and a payout ratio of more than 100% if we include the dividend, I would guess that management may cut the dividend soon.

But that could be viewed as a positive for the stock, and the fact that the company continues to post outstanding results in this natural gas pricing environment, with strong returns, production growth, and cost reductions continuing to bring value to the company and its shareholders, shows what a high-quality name this is.

Indeed, Peyto’s third-quarter results were once again strong, with EPS increasing to $0.27 from $0.14 in the same quarter last year. Funds from operations increased 9% to $139 million.

Peyto has recently shifted much of its drilling to horizontal drilling, which brings with it greater efficiencies and a strong production profile going forward.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas does not own shares in any of the companies mentioned in this article.

More on Dividend Stocks

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »