Although the S&P/TSX Composite Index has made a significant recovery from its March lows, some companies have failed to participate in the recovery rally and are offering greater value. In this article, we will look at three TSX stocks that have lost a significant share value but have the potential to deliver superior returns over the next three to five years.
Canadian Natural Resources
My first pick would be crude oil and natural gas producer Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ), which has lost over 44% of its stock value this year. The decline in global oil prices weighed heavily on its financials and stock price. In the recently completed second quarter, the company had reported adjusted net losses of $772 million compared to net profits of $1.04 billion in the previous year’s quarter.
Despite the weak second-quarter performance, the company generated adjusted funds flow of $415 million, driven by its effective and efficient operations. Given its low-cost structure, the company needs oil prices on WTI (West Texas Intermediate) to trade at US$31 per barrel to break even. With the oil prices recovering from their April lows following the reopening of economies, the company’s financials could improve.
By the end of the June quarter, CNQ’s liquidity stood at $4.1 billion. So, it has ample liquidity to ride out this volatile period and also pay its dividends. It has raised dividends for the past 20 consecutive years. Currently, the company’s dividend yield stands at a juicy 7.2%. So, given its low-cost operations, high dividend yield, and robust liquidity, CNQ provides an excellent buying opportunity for long-term investors.
Air Canada
The pandemic-infused travel restrictions have weighed heavily on the airline companies across the world. With over 90% of its aircraft grounded, Air Canada’s (TSX: AC) revenue declined by 89% in the second quarter, while its net losses came in at $1.75 billion. Also, it burnt $1.7 billion of cash during the quarter. The extension of the Canadian government’s international travel ban until October 31 could increase the company’s financial burden.
However, the company has taken several cost-cutting initiatives, such as slashing 50% of its workforce and retired 79 of its aircraft, to reduce its cash burn. By the end of June quarter, the company had $9.12 billion of liquidity. So, I believe it has ample liquidity to ride out this crisis.
The demand for the easing of travel restriction has been growing across the industry. I expect the Canadian government to lift restrictions later this quarter. Although it may take some time for the passenger demand to return to its pre-pandemic levels, the company could bounce back more quickly, given its high market share.
With its stock down 66% for this year, Air Canada offers an excellent entry point for investors with three to five years of time frame.
BlackBerry
With its stock down over 25% for this year, BlackBerry (TSX: BB)(NYSE: BB) is my third pick. Its exposure to the automotive industry, which was severely hit amid the pandemic-infused shutdown, had dragged its stock price down.
However, its BTS (BlackBerry Technology Solutions) segment showed some recovery compared to its last quarter lows given the recovery in the automotive sector with the resumption of production post lockdown. Meanwhile, the company’s management expects the segment to return to its pre-pandemic levels early next year.
In May, the company launched the Spark Suite platform, which offers a range of cybersecurity and endpoint management solutions. The platform is in great demand and has helped the company acquire many blue-chip clients. The company also recently launched its Guard platform in the Managed Detect and Respond Services (MDR) segment, which could reach US$2 billion by 2024 as per Frost & Sullivan’s estimates.
Given its robust growth prospects, I believe the company can deliver superior returns over the next three years.
