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AltaGas Ltd. (TSX:ALA) and These 2 Energy Stocks Are Must-Own Stocks for the 2nd Half of 2018

With the S&P/TSX Composite Index continuing to hit new highs of just under $16,500 for a one-year return of almost 9%, it is increasingly difficult to find stocks that are trading at levels of real value. And while investors have done really well in the last year, even if they just passively bought the index, this may be about to come to an end.

So, here I list three undervalued stocks that are strong buys, and that investors should consider investing in for long-term wealth creation.

AltaGas Ltd. (TSX:ALA)

The first is AltaGas, an energy infrastructure stock that is currently yielding 8.07%. This is a dividend stock that has good upside in its share price as well.

The stock has declined almost 7% in the last year, a reflection of the many uncertainties that the company is facing. Uncertainties include the closing of the WGL acquisition and the company’s asset sale program, both of which are progressing nicely towards conclusion.

So, let’s stay focused and look through this uncertainty, because the payoff is big.

WGL will add quality assets to the company, be very accretive to earnings and cash flow, and bring with it a plethora of new growth opportunities. Management has identified $5 billion in immediate growth opportunities plus an additional $2 billion in opportunities through to 2021.

And in the first full year after the acquisition, 2019, management expects approximately 85% of its EBITDA to come from contracted or regulated assets, providing stability and predictability.

So, AltaGas is a company with a solid history and a solid future.

In the last five years, AltaGas has grown its asset base to over $10 billion from $3 billion at the end of 2010 through acquisitions as well as construction projects, and it has delivered a compound annual growth rate in its dividend of 9%.

Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE)

Cenovus is another energy stock representing good value at this time. With oil closing in on $70 and continuing to show strength, Cenovus’s upcoming results will clearly be a reflection of this.

Cenovus is a strong buy due to its large resource base, good growth potential from its oil sands expansions, and attractive valuation. Cost reduction, debt reduction, and an unrolling of the poorly timed hedge book should act as catalysts for long-term value creation.

Trading at a 0.8 times price to book multiple, this stock represents good long-term value.

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE)

I have been bullish on Baytex for a while, and it was doing really well until the company announced the acquisition of Raging River Exploration, which sent the stock tumbling 29% to current levels.

The actual merger looks good, as it strengthens Baytex’s balance sheet and provides Baytex with quality light oil assets and land in the Duvernay area in Alberta. The problem is with the all-equity financing, which results in significant dilution in 2019.

But on a go-forward basis, the stock has declined enough in response to this deal to make it an attractive buy again.

Bottom line

In summary, investors would do well to consider these three undervalued stocks, which I think will outperform the market this year.

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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 has no position in any of the stocks mentioned. AltaGas is a recommendation of Stock Advisor Canada.

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