Value stocks have had a tough decade. Ever since the financial crisis of 2008, growth and tech stocks have clearly outperformed old-school, seemingly boring companies. This year, the pandemic has accentuated this disparity. Tech stocks are trading at historic highs, while value stocks have never been cheaper.
In my view, this creates the perfect environment for a contrarian investor to dive into the market. Bargain valuations mean there is limited downside and plenty of upside for value stocks that are currently out of favor. Here are my top three picks.
Utility giant value stock
Nothing gets more predictable, reliable or essential than a public utility. Canadian Utilities (TSX:CU) is a prime example. The stock is down 14% year-to-date, pushing its dividend yield to 5.2%.
Meanwhile, the company’s natural gas and electricity transmission and distribution business is as robust as ever. Energy demand for natural gas may have dipped this year, but could soon recover. Meanwhile, electricity demand has been surging as everyone was confined to their homes for several months.
This resilience of the underlying business model is the reason why Canadian Utilities has delivered stunning dividend growth even in previous recessions. In fact, the company has expanded its dividend payout for 48 consecutive years so far, making it a bonafide Dividend Aristocrat.
Given that the company has $940 million in cash on hand and has maintained a dividend payout ratio at 77%, another dividend hike this year wouldn’t be surprising.
Global convenience value stock
Convenience store operator Alimentation Couche-Tard (TSX:ATD.A)(TSX:ATD.B) is another robust player that seems to be sailing through this crisis unharmed. After a brief dip in March, the stock is now up 9.7% year to date.
At first glance, this value stock may seem like a trap. After all, most Circle K and Mac’s stores are located at gas pumps that have been desolate for much of this year. As electric vehicles replace gasoline cars, these gas stations could become permanently obsolete.
However, Couche-Tard is well prepared for this future. They’ve started rolling out electric charging points across their global outlets. They’ve also invested in a small cannabis start-up to enhance their retail offering. In short, they’re future-proof.
Investors seem to have overlooked these factors. The stock trades for a mere 14.9 times trailing earnings. It’s the ultimate value stock that deserves your attention.
Family dairy value stock
Family-owned dairy giant Saputo (TSX:SAP) is the kind of value stock Warren Buffett would gladly add to his list. The Montreal-based firm has expanded to a $13.7 billion valuation over the past 66 years. Now, it’s the largest milk products producer and distributor in the country.
In Fact, it’s one of the 10 largest dairy companies in the world. Saputo’s private label cheese brands are popular in countries like the U.S., the U.K, Australia, and Argentina. This export-heavy model makes Saputo a prime value stock for investors who believe the Canadian dollar could soon lose value.
Regardless of currency fluctuations, Saputo’s underlying fundamentals remain strong. Revenue declined 7.6% in the first quarter of the year, but net earnings rose by 16.9% to $141.9 million. Now, Saputo stock is trading for a price-to-earnings ratio of 23.6. It’s another excellent value stock for long-term investors.
