Stock market valuations are a tad on the frothy side, but as I described in a prior piece, stocks aren’t as expensive as they seem, given the type of pandemic-plagued environment in which we find ourselves.
That’s not to say there isn’t a frenzy in some of the sexy plays out there, however. In my opinion, the appetite for rampant speculation has inflated three prominent bubbles that, once burst, will leave the rest of the markets mostly spared. Specifically, I think certain electric vehicle plays, overbought recent Initial Public Offerings (IPOs), and cryptocurrencies (Bitcoin and all the sort) are becoming bubbly beyond belief.
If you’re looking for huge gains in the year ahead, I’d like to direct you to undervalued plays that could make a return once we have a sustained (and probably much-needed) growth-to-value rotation. In due time, betting on sexy stories at any price will become less popular once pockets of severe overvaluation are corrected, and speculators lose their shirts.
What will take the place of the speculative frenzy? Prudent investment in the shares of wonderful businesses that trade at discounts to their intrinsic value ranges.
Good, old-fashioned Warren Buffett-style investing will rise again, and those who didn’t give into the FOMO (fear of missing out) mentality with Bitcoin and all the sort will be the ones that could be the real winners over the long run.
Consider shares of Alimentation Couche-Tard (TSX:ATD.B) and Restaurant Brands International (TSX:QSR)(NYSE:QSR), both of which, I believe, will outperform Bitcoin and Tesla, two of today’s “sexiest” of investments. Both stocks have been unloved and are overdue for a correction to the upside once investors pay focus on valuation instead of sheer momentum.
Couche-Tard
Convenience store kingpin Couche-Tard has been navigating through the coronavirus crisis rather well. With management focus on driving same-store sales growth and gross margins, Couche is well on its way to meeting its initial target of doubling its net income in five years.
With a tonne of cash and credit sitting on the sidelines, the M&A stud could either scoop up an elephant-sized deal or go on another one of its acquisition sprees that drove up the stock in the early part of the 2010s. Either way, investors know that Couche knows how to drive synergies from every deal it makes, and I expect the stock will soar upon the announcement of its next big deal.
Like Warren Buffett, Couche-Tard hasn’t been as active as it probably would have liked of late. Those with long-term time horizons should appreciate Couche management’s patience. Once a synergy-rich opportunity presents itself, Couche will be ready to pounce.
The stock trades at 13.6 times earnings, which I think makes zero sense. Given the low-risk double-digit earnings growth potential, I see ATD.B facing a re-valuation such that the stock sports a multiple of at least 20 times earnings.
Restaurant Brands
Restaurant Brands is the company behind Tim Hortons, Burger King, and Popeyes. The latter brand’s growth prospects, I believe, has been discounted by investors who seem to focus a majority of their attention on the former brand’s recent bout of underperformance.
With the COVID-19 pandemic likely to wane on sales amid continued shutdowns, I do think Restaurant Brands is one of those stocks that could rise out of this crisis in a profound position of strength. With mom-and-pop restaurants going insolvent due to COVID, Restaurant Brands will discover that the competitive landscape will be that much less crowded, allowing the firm to capitalize on the pent-up demand for eating out in the post-COVID world.
With drive-thru modernization efforts underway, Restaurant Brands, I believe, will be looking to catch its bigger brothers in the fast-food scene over the next three years. If you seek outsized results over the longer-term, I’d look to load up on QSR stock before it has a chance to follow in the footsteps of its fast-food peers back to pre-pandemic levels.
