3 Top Undervalued TSX Stocks to Buy Right Now for Superior Returns

Available at a deep discount, these three undervalued TSX stocks could deliver superior returns this year.

| More on:
stock analysis

Image source: Getty Images

Despite the rising COVID-19 infections worldwide, the Canadian equity markets remain strong, as the rollout of multiple vaccines has increased investors’ hopes of life and businesses returning to pre-pandemic ways soon. Currently, the S&P/TSX Composite Index is trading just 2.5% lower than its all-time high.

Meanwhile, some companies have failed to participate in the recovery rally and are available at deep discounts. So, investors can buy the following three undervalued Canadian stocks to earn superior returns this year.

Enbridge

The weak oil demand amid the pandemic-infused lockdown had lowered Enbridge’s (TSX:ENB)(NYSE:ENB) liquid pipeline throughput, which weighed heavily on its financials and stock price. It had lost over 21% of its stock value last year.

Meanwhile, with the rollout of multiple vaccines, the economic activities could improve this year, driving the oil demand higher. Further, the company has taken several cost-cutting initiatives, which could improve its profitability.

Enbridge’s management expects its 2021 DCF per share to be in the range of $4.70 to $5.00, representing a 4.3% growth from its mid-point guidance of 2020. Further, the company is going ahead with its $16 billion worth of secured growth projects, which could contribute $2 billion to its adjusted EBITDA from 2023. So, the company’s growth prospects look healthy.

Besides, Enbridge has raised its dividends for 26 consecutive years. It plans to pay quarterly dividends of $0.835 per share this year, with an annualized payout rate of $3.34 per share and an attractive dividend yield of 8.2%. Amid the decline in its stock price, Enbridge’s valuation looks attractive.

It trades at a forward price-to-earnings multiple of 15.4 and a price-to-book multiple of 1.3. So, given its healthy growth prospects, high dividend yield, and attractive valuation, I expect Enbridge to deliver superior returns this year.

Air Canada

The pandemic-infused travel restrictions had severely hit the passenger airline industry last year, with Air Canada (TSX:AC) losing over 53% of its stock value. Amid the low passenger volumes, the company has been bleeding cash while its debt levels are rising. The management also expects its cash burn in the fourth quarter to be in the range of $1.1 billion to $1.3 billion, which is higher than the $818 million that the company utilized in the third quarter.

However, Air Canada’s cargo revenue has been growing since its launch in March. Amid higher demand, the company has increased the number of cargo-only-flights, which has boosted its financials. Meanwhile, the widespread distribution of vaccines could prompt governments to ease travel restrictions, thus improving passenger volumes.

Also, Canadian households are sitting on a considerable amount of cash, which they had saved for emergencies. With the improvement in the economic activities and falling unemployment rate, they could spend the cash on discretionary items, which could benefit Air Canada.

The company has taken several cost-cutting initiatives, which is encouraging. So, despite the near-term challenges, I expect Air Canada to deliver superior returns this year.

Suncor Energy

Suncor Energy (TSX:SU)(NYSE:SU), which operates both upstream and downstream assets, has lost around 50% of its stock value last year, as weak oil prices weighed on the company’s financials. However, amid the vaccine euphoria, crude oil prices have risen.

Also, the U.S. Energy Information Administration has provided an optimistic short-term outlook for the energy sector. The federal agency expects Brent oil to average around $49 per barrel in 2021, representing a 14% increase from the expected average of $43 per barrel in the fourth quarter of 2020.

Meanwhile, Suncor Energy’s management expects its production to increase by 10% this year, while its operating expenses could fall by around 8%. The company also expects to repurchase $500 million worth of shares this year. So, along with the improved operating metrics, higher oil prices and share repurchases could boost Suncor Energy’s stock price.

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.

The Motley Fool owns shares of and recommends Enbridge. Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »