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2 TSX Index Stock That Look Cheap and Could Surge in 2019

Stacks of gold coins, flag of Canada and dice cube

The October rout that hit a number of the top stocks in the TSX Index has finally given Canadians a chance to pick up some quality names at reasonable prices.

Savvy investors know that pullbacks often create attractive buying opportunities, especially when the stocks are being bought for long-term holdings in a TFSA or RRSP portfolio.

Let’s take a look at two companies that might be interesting picks today.

Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ)

CNRL is already clawing back some of the losses. The stock is up to $38.50 from $35.50 last week, but still trades well short of the 2018 high of $49 per share.

Oil prices are certainly down from the summer peak, but WTI is still nearly 50% above where it was in the summer of 2017, and investors could see crude prices spike in the coming months.

Why?

New American sanctions against Iran are now in effect, and that could put a serious dent in global supply. Saudi Arabia has said it will increase production to offset the expected drop as a means to keep prices under control, but there is no guarantee that will happen. Even if Saudi Arabia boosts output, it might not be able to fully compensate for other supply challenges faced by some OPEC members, including Venezuela.

CNRL has production that spans the full range of oil types, ranging from light crude to heavy crude and bitumen oil sands. The company is also a major natural gas producer. A strong balance sheet and a diversified asset base give CNRL the flexibility to allocate capital to the highest-return opportunities, according to shifts in the market place.

The company reported solid Q3 result with adjusted funds from operations of $2.8 billion compared to $1.7 billion in Q3 2017. Adjusted net earnings from operations rose to $1.35 billion.

CNRL raised the dividend by 22% earlier this year and plans to ramp up share buybacks, while paying down debt with residual cash flow after covering the capital program and dividend payments.

At the time of writing, investors can pick up a yield of 3.5%.

Royal Bank (TSX:RY)(NYSE:RY)

Royal Bank currently trades for $96 per share, which is well off the $108 the stock fetched earlier in the year. At the current price, the trailing price-to-earnings ratio is about 12. This is higher than a couple of its peers that are now down to multiples near 10, but Royal Bank is arguably a safer bet.

The company has a balanced revenue stream spread out across personal and commercial banking, capital markets, wealth management, investor and treasury services, and insurance. The Canadian residential mortgage book is large, but Royal Bank is more than capable of riding out a rough patch in the housing market, and the potential negative impact on the mortgage portfolio from defaults due to rising interest rates should be more than offset by gains in net interest margins and investment yields in other areas of the bank’s operations.

Royal Bank has a U.S. division focused on wealth management, and that group should continue to do well.

The Canadian and U.S. economies remain strong, and management is targeting earnings growth of 7-10% per year over the medium term. Investors might want to start nibbling on the stock before the Q4 2018 results come out.

Royal Bank’s dividend provides a yield of 4%.

The bottom line

CNRL and Royal Bank are industry leaders with strong businesses that continue to grow. The recent drops in the prices of the two stocks appear overdone, and investors who buy now could see some nice returns next year.

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Fool contributor Andrew Walker has no position in any stock mentioned.

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