With a market crash potentially on the horizon in 2021, investors ought to focus on companies that represent value and safety right now. In this context, companies in the oil & gas sector that actually turn a profit in this environment ought to be highly sought after. Unfortunately, this certainly doesn’t seem to be the case for one of my unique value picks in the Canadian energy sector.
Altagas Ltd. (TSX:ALA) has an interesting value proposition as a deep value play currently. With valuations sky-high in other sectors, deep value investors might want to consider this contrarian option right now. Beating a market crash is made easier by finding companies that are already cheap that could increase in value in a bear market.
My perspective on the oil & gas sector, and particular the Canadian energy sector, remains outright bearish. That being said, I do think there are pockets of deep value. Thus, Altagas ought to be included on investors’ value watch lists at the very least, in my view.
Altagas has recovered remarkably from the company’s pandemic-driven 52-week lows in March. This is due, in large part, to better than industry average fundamentals, a key investing thesis for this stock. I think having strong fundamentals is more important than ever, particularly in sectors such as energy.
Value investors looking at this sector will only look at the highest quality companies with the widest degree of safety. Accordingly, Altagas is a company that ought to be put in this bucket.
Altagas’ current valuation looks cheap relative to strong earnings. This company is trading at only around 15 times earnings. Indeed, any stock trading at these levels today is cheap, given the valuations of so many stocks in other sectors that are valued at higher multiples compared to sales.
Additionally, Altagas has a reasonable and sustainable dividend yield around 5.3%. This dividend is fully covered (payout ratio is around 80%), with reliable free cash flow to support this dividend long-term.
In addition, Altagas’ price to book ratio remains depressed, signaling significant value at these levels.
Growth projections bullish
In addition to strong fundamentals, Altagas also has excellent growth potential relative to its peers. According to fellow Fool contributor Christopher Liew, Altagas has projected earnings growth of 20% for 2021. This earnings growth is expected to come from strong core operating results in addition to improved commodity prices in the coming year.
The fact that Altagas has also raised its dividend is bullish for income investors as well. Dividend quality in this sector has been questioned. However, companies like Altagas appear to have solid dividends despite depressed commodity prices. This furthers the thesis for income investors as well.
Whether you’re an income or value investor, Altagas looks very cheap at these levels. Trading below book value, I see a rebound of at least 15% on the horizon for the company to get back to a realistic valuation. If commodity prices rebound further, we could see a much larger stock price increase for Altagas.
Either way, this is a stock that has been beaten up so much the amount of downside left may be limited. For those looking to diversify a bit more into energy, Altagas is a great pick.
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Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool recommends ALTAGAS LTD.