Amid the encouraging announcements on vaccine development, there has been a shift in investors’ focus towards value stocks. With life and businesses expected to return to pre-pandemic levels soon, I believe it is the right time to lap up the undervalued TSX stocks, which were deeply impacted by the pandemic. This article will look at three such companies that could deliver superior returns over the next three years.
The pandemic had a severe impact on the passenger airline industry, including Air Canada (TSX:AC). Amid the pandemic, governments worldwide imposed travel restrictions, leading to a decline in passenger volumes. Air Canada had witnessed a 96% and 88% fall in its passenger volumes during the second and third quarters, respectively. High net losses and rising debt levels had dragged the company’s stock price down.
However, the vaccine euphoria and a potential bailout package have improved investors’ sentiments driving Air Canada stock 77.8% higher since the beginning of November. The mass distribution of the vaccine could pose challenges. However, the vaccine could prompt governments to ease travel restrictions, potentially boosting its lucrative international travel.
Many reports have suggested that it may take a couple of years for passenger demand to return to pre-pandemic levels. However, Canadian households are sitting on a massive amount of cash, which they had saved for emergencies. Meanwhile, with jobs slowly coming back, they could spend that amount on discretionary items, which could benefit Air Canada.
Further, the company has also taken several cost-cutting measures to lower its cash burn and net losses. With its stock trading 46% lower for this year, it would be an excellent entry point for long-term investors.
Amid the vaccine hope, crude oil prices have increased to over US$45 per barrel, bringing some respite to the energy sector, including Suncor Energy (TSX:SU)(NYSE:SU). Since the beginning of November, the company’s stock is up 53.4%. Despite the strong buying, the company still trades over 45% lower for this year and offers good value.
Meanwhile, Suncor Energy reported a significant sequential improvement in the third quarter. Its net losses narrowed down to $12 million compared to $614 million in the second quarter, while its funds from operations increased from $488 million to $1.17 billion. Further, the company had stated that it was on track to slash its operating and capital expenses by $1 billion and $1.9 billion this year, respectively.
Suncor Energy also plans to lay off 10-15% of its workforce over the next 12-18 months amid process and technology improvement, which would help the company achieve its target of $2 billion in free funds flows from operations. Further, the management expects its average production levels to increase by 10% on a year-over-year basis in 2021, while its downstream utilization rate could improve by 6% to 93%.
With higher oil prices and increased production levels, I expect Suncor Energy’s financials to strengthen in the coming years.
The pandemic-infused social-distancing guidelines have also hurt the entertainment industry, including Cineplex (TSX:CGX), which owns and operates 164 theatres across Canada. Amid weak footfalls, the company had suffered net losses of over $220 million in its previous two quarters. Its high cash burn and rising debt levels have also weighed heavily on the company’s stock price.
Meanwhile, the buying has returned amid the vaccine hope, with Cineplex’s stock price rising over 86% since the beginning of November. Despite the surge, the company still trades 72% lower for this year, proving an excellent buying opportunity.
At the end of the third quarter, Cineplex had opened all its 164 theatres but operated at limited capacity. Meanwhile, the vaccine could increase footfalls and allow the company to operate at full capacity, improving its profitability. Further, many distributors have moved the release date of some prominent movies to the next year amid the pandemic. So, I expect Cineplex numbers to be better in 2021.
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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 Rajiv Nanjapla has no position in the companies mentioned.