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2 Cheap “Sleeper Stocks” That I See Exploding Higher

If you want to beat the markets, you have to be a buyer when others are sellers. But more important, you need to be looking where others aren’t. The stocks that have been forgotten by the average Canadian investor tend to exhibit a wider discrepancy between market value and intrinsic value, so if your goal is to beat the market, you need to roll up your sleeves and remember the forgotten ones.

Without further ado, consider Canadian Tire (TSX:CTC.A) and Aritzia (TSX:ATZ), two cheap Canadian retailers that many investors have unfairly written off. Unlike most other brick-and-mortar retailers that are getting crushed by their digital counterparts, both Canadian Tire and Aritzia have not only survived the initial onslaught, but they’re both picking up traction despite their dirt-cheap valuation metrics.

Canadian Tire

In the case of Canadian Tire, the stock is the cheapest it’s been in recent memory. Through a combination of generous dividend hikes and falling shares, the stock now sports a dividend yield that’s around 3%, which is mighty impressive for a stock that’s growing its dividend at an annualized double-digit pace.

Despite the yield that’s more enticing to prospective income investors, the stock has remained a dog, primarily because of the unfortunate state of brick-and-mortar retail. Nobody wants to own retail stocks these days, and because there have been subtle pressures placed by digital competitors, many investors believe that the e-commerce disruption trend is just beginning when that’s probably not the case.

Canadian Tire has shifted its business strategy and is focusing on driving in-store traffic and acquiring (or building upon) its already impressive lineup of exclusive brand offerings like Helly Hansen, Woods, MotoMaster, and the like. That’s the right strategy to take, and as management continues to pull out all the stops, Canadian Tire is due for more significant multiple compression and yield expansion.

At the time of writing, the stock trades at a 11.3 forward P/E, a 2.2 P/B, and a 0.7 P/S, all of which are lower than the company’s historical average multiples as well as the retail industry average multiples.

Canadian Tire is a dirt-cheap stock with a considerable margin of safety at these levels, so investors looking for value shouldn’t shy away from the name any longer.

Aritzia

If you’re like most investors, you probably wrote off Aritzia after it suffered a huge decline that followed its weak IPO. I urged investors to avoid the IPO and noted that Aritzia faced a high degree of “fashion risk” and that gross margins were at risk of compressing as a result of excessive discounting, and inventory liquidation.

It’s hard to tell what’ll be hot. And what’s hot one week may not be hot the next week. So, indeed Aritzia seemed like a highly unpredictable business with a lot of baggage and an unclear growth strategy at the time of the IPO.

Fast-forward to a few months ago, and I’ve changed my stance to bullish, especially after the company teamed up with influencers on social media to promote product releases. With the Kendall Jenner campaign for the down-based Super Puff jacket, I immediately recognized Aritzia’s solution to the “fashion risk” issue.

Why wait until launch to see if a product is hot? Why not make it hot before it hits store shelves by getting influencers like Kendall Jenner to give their “blessing” to a particular line of clothes?

I think Aritzia’s new-age advertising strategy will gain the company a lot of new fans. And with an ambitious U.S. expansion underway, the timing couldn’t be better. The stock trades at 18.6 times next year’s expected earnings, and given the potential for double-digit top-line growth and a potential means to expand gross margins further, Aritzia could be a sleeper stock for the ages.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of CANADIAN TIRE CORP LTD CL A NV.

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