The TSX Index has been on a heck of a run since March. But the recovery hasn’t been split equally among sectors. The tech sector has done a considerable amount of heavy lifting, while other sectors, including energy and financials, are still in the gutter. With safe and effective COVID-19 vaccines that have just begun to be administered, there’s more than just hope in store for 2021.
Should you buy some of the dogs of the TSX?
This piece will have a look at some of the most unloved stocks this year. While picking the Dogs of the TSX may have mixed results in any given year, it’s worthwhile to reach for the names that have been feeling the most pressure from the coronavirus crisis, as it’s these names that could have the most room to run once this horrific pandemic draws to a close.
While recovery expectations for certain hard-hit energy and financial stocks may end up being modest, the following two TSX stocks, I believe, are so underpriced such that it won’t take much to propel them much higher, as investor focus shifts from damage control to EPS recovery.
Canadian Natural Resources
It’s been a rough year for CNQ, but hats off to the company for taking advantage of opportunities on the decline with its acquisition of Painted Pony Energy to diversify the firm’s energy mix further. CNQ may have walked away with one of the biggest steals of 2020 with the natural gas producer,while shares were depressed.
With oil prices on the rise again, things are looking up for the Albertan oil sands producers. As the newest king of the Canadian oil patch, CNQ looks to be a top COVID-19 recovery play and makes a strong case for why it should be at the top of your shopping list for 2021. The dividend, which currently yields 5.5%, is on strong footing.
While the stock is up over 150% from its March depths, it remains a far cry away from its pre-pandemic highs, which could realistically be tested over the next 18 months.
CNQ stock is dirt-cheap at 1.2 times book value and is a compelling contrarian option if you’re willing to go against the grain in the heavily out-of-favour fossil fuel industry.
Laurentian is probably my least favourite bank stock in Canada. The stock has been a perennial underperformer in the years before the coronavirus crisis thanks to self-inflicted wounds and an isolated crisis of its own that caused shares to drag. The pandemic only severely exacerbated the troubles at the regional Canadian bank that was already under pressure.
Today, the stock is down over 46% from its 2017 all-time high. While shares bounced in November on the back of COVID-19 vaccine news, Laurentian Bank stock remains among the riskiest of financials to bet on, even at these depths.
That said, one has to draw the line somewhere. As someone wise once said, any stock can be a buy if the price is right. With shares trading at just 0.4 times book value, the stock’s intrinsic value range is well above where the stock is currently trading (around $32 and change).
The regional bank remains tough to evaluate, though. As such, I’d put the name in the Warren Buffett-esque cigar-butt category and would only encourage deep-value investors with strong stomachs to buy shares at these depths.
The bank has more than its fair share of baggage, and there’s still a complex transformation to get through. Thus far, the transformation has been very bumpy. If management can pull off the transformation, Laurentian Bank could soar, but that’s a very big “if.”
Fortunately, with a Common Equity Tier 1 (CET1) ratio in the single-digits (9.6% as of the latest quarter), Laurentian remains well above regulatory minimums. That said, the CET1 is considerably lower than its bigger brothers in the Big Six.
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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 Joey Frenette has no position in any of the stocks mentioned.