MENU

A Cheap Stock to Buy Right Now: 36% Return!

Image source: Getty Images.

Make no mistake: we are in a trade war with the United States. The trade rhetoric that began in earnest at the beginning of the year has turned into a tit-for-tat tariff battle.

Dominating the trade headlines are the steel and aluminum industries. Unfortunately, Canada’s steel companies have been caught in the middle and their share prices have tumbled. Although there are some real concerns, not all deserve to be punished to such a degree.

One such stock is Russel Metals Inc. (TSX:RUS). Contrary to many of its peers, Russel conducts very little cross-border trading. It has distribution centres on both sides of the border and management has actually welcomed the higher steel prices.

Year-to-date, Russel’s stock price has lost almost 10% of its value. Don’t be scared off: now is the perfect time to buy.

Blowout earnings

Despite the overhang of a trade war, Russel Metals posted blowout first quarter earnings in early May. The company grew revenues by 15.8% year-over-year (YOY) and posted earnings per share (EPS) of $0.62. Analysts were expecting EPS of $0.43. — a 44% beat on the bottom line!

Russel also grew free cash flow by 17.6% YOY to $0.97 per share, which more than covers the company’s $0.38 per share dividend. A dividend that currently yield’s a juicy 5.66%.

Its 19% return on equity continues to be one of the best in the industry. The company is delivering solid results.

Diversification

Russel has been caught up in the media storm surrounding steel tariffs. Lost in the noise? The company has significant energy operations. Its energy products segment distributes oil country tubular goods, line pipe, tubes, valves and fittings to the oil and gas industry. The segment is clustered in two areas: Western Canada and the Southwestern United States.

In the first quarter, its energy products segment accounted for 41% of the company’s revenues and 37% of operating profits. Buoyed by a rebounding oil and gas sector, energy product segment revenues increased 13% over the previous year.

Valuation

Russel’s recent weakness provides an excellent opportunity. It’s trading at a cheap forward price-to-earnings (P/E) ratio of 10.62 and the company’s P/E to growth (PEG) is 0.22. A PEG under of under 1 signifies that the company’s share price is not keeping up with expected earnings and is considered undervalued.

Analysts expect the company to post EPS of $2.48 in 2018. At today’s P/E ratio of 12.62, that implies a share price of $31.30 by end of year, an increase of approximately 16% over today’s price. On an annualized basis, that’s a 36% return!

Don’t pass on this great opportunity. Russel Metals is a great pick for both your TFSA and RRSP portfolios.

On April 25th, the "ultimate buy signal" started flashing...

Just 6 weeks ago, The Motley Fool's Iain Butler revealed an ultra rare "triple down" stock recommendation - and investors all over Canada are rushing to get in! Why? Because past "triple downs" have averaged over 100% returns. One "triple down" alone earned 440% returns (in just over two years' time).

To discover the brand-new "triple down" recommendation, simply click here. You'll be whisked to a special investor memo prepared by The Motley Fool Canada. The only catch is you'll have to hurry! This brand-new report could be withdrawn at any time.

Click here to preview the brand-new "triple down"!

Fool contributor Mat Litalien has no position in any of the companies listed. 

 

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.