Is This a Danger Zone or an Undervalued Mini-Portfolio?

Husky Energy Inc. (TSX:HSE) has been undervalued for some time now, but are stocks like it worth buying for the long term?

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The number one Canadian aero stock in some investors’ books, Magellan Aerospace (TSX:MAL), continues to trade at a discount against its future cash flow value, currently around 44%, with low market variables. But should investors add it to a mini-portfolio of low-P/B ratio stocks or avoid it along with the other following bargain tickers?

Magellan Aerospace

A prime ticker for lovers of all things to do with flight and satellites, Magellan Aerospace offers a fair amount of diversification on various fronts from inter-industry reach to geographical spread to customer base. A dividend yield of 2.27% is on offer, which would make this stock a potentially solid choice for a TFSA, RRSP, or RRFI if its outlook were just a little brighter.

While it may not be what you’d call a growth stock, Magellan Aerospace makes up for it in other areas: a decent balance sheet is characterized by low debt at 9.3% of net worth, while good value for money is suggested by a P/B of 1.4 and P/E of 11.

Up 4.66% in the last five days at the time of writing, Magellan Aerospace is on the rebound this year, recovering from last November’s nosedive. Though the one- to three-year outlook is mediocre with an expected 2.9% annual growth in earnings, a negative past-year earnings-growth rate is alleviated somewhat by positive five-year growth of 15.8%.

Equitable Group (TSX:EQB)

Equitable Group has an acceptable proportion of non-loan assets held, an attribute it has in common with the Big Six bankers. However, Equitable Group has advanced more loans than it holds customer deposits, which implies a level of borrowing that may put off the risk-averse long-term investor. However, Equitable Group’s dividend yield of 1.76% may be of interest to passive-income fans, and it is looking at a 12.2% expected annual earnings-growth rate.

Trading with a 27% discount and down 2.26% in the last five days, Equitable Group has a so-so track record, with one- and five-year past earnings-growth rates of 3.2% and 12%, respectively. Undervaluation is suggested by a low P/E of seven and P/B of 0.9, which makes it a potential buy for the long-term investor with a focus on net per-asset worth.

Husky Energy (TSX:HSE)

As solid an energy play as any on the TSX index, Husky Energy is going for a 41% discount, with undervaluation further suggested by a P/E of 10 and P/B of 0.8, both of which beat the market. Indeed, this could be one of the better stocks for an energy investor bullish on higher oil.

Husky Energy had a great 2018, as shown by its one-year past earnings growth of 93.8%. Overall, a positive — if underwhelming — track record is shown by a five-year average growth of 4.5%. However, passive-income investors with a low tolerance for risk should be reassured by a below-threshold debt level of 29.3%.

The bottom line

Magellan Aerospace’s PEG of 3.8 is suggestive of overvaluation in that arena, though all other signs point to this sturdy aero stock being a bargain. More shares have been bought than sold by Husky Energy insiders in the last few months, meanwhile, and with a 3.45% dividend yield on offer, investors have just over a week until it hits its buy limit.

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 Victoria Hetherington has no position in any of the stocks mentioned.

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