Value stocks generally beat growth stocks in the very long term. However, this has not been the case for the last decade or so. Growth stocks have notably trounced value since the 2008 financial crisis. But things may change post-pandemic. Interestingly, value stocks look poised for a handsome upturn, especially amid the stable economic recovery.
Value stocks are those that trade at a large discount but offer higher growth potential in the long term. They are generally out of the limelight, unlike growth stocks.
Growth stocks outperformed in the last decade, as inflation trended lower in this period. Now, with the pandemic’s end in sight and a looming demand increase amid the economic re-openings, inflation may soon change the course and start increasing again.
At the same time, higher inflation is bad news for overvalued assets. Growth stocks, which generally sport exorbitant valuations, could underperform in the next few years as inflation trends higher.
Here are my top TSX stock picks for value investors.
Canada’s top consumer lender goeasy (TSX:GSY) could see enormous growth in the next few years. Its EPS has increased by 24% since 2001, which is an outstanding growth for a financial services company. Notably, the stock is currently trading at 13 times its 2021 earnings — an attractive valuation for underlying growth.
Non-prime lending is a $231 billion market in Canada and is comparatively underserved. Billion-dollar lender goeasy could see pent-up demand in 2021, as mobility restrictions gradually ease.
An increase in new loans and improving customer repayment patterns in Q3 2020 were certainly promising signs for goeasy. The stock has surged more than 30% in the last 12 months. It could continue to soar higher, driven by solid underlying growth and a cheaper valuation.
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Utilities are relatively safer bets due to their slow-moving stocks and regular dividends. Canadian utility Hydro One (TSX:H) stock looks attractive at the moment. The stock has soared 15% in the last 12 months and currently yields almost 4%.
Hydro One offers an additional layer of safety to investors, as it is not involved in power generation. It is a transmission and distribution utility and offers a low-risk investment proposition.
Hydro One expects to increase its dividends by 5% per year for the next few years. Utilities generate visible earnings and thus, offer safe and predictable dividends. Hydro One’s expected dividend growth is in line with the industry average. Thus, its earnings stability and a lucrative valuation make it a strong dividend stock in the current market scenario.
Canadian gold miner B2Gold (TSX:BTO)(NYSE:BTG) has seen exceptional growth in the last few years. Its net income has soared from $39 million in 2016 to $637 million in the last 12 months. B2Gold’s earnings more than doubled last year, driven by higher production and higher realized gold prices.
Interestingly, such a rapidly growing stock is currently trading at close to 10 times its 2021 earnings. That’s a notable discount compared to peers as well as to its historical average.
B2Gold stock trended lower after the yellow metal saw some pullback in the second half of last year. But macroeconomic developments suggest a decent recovery for gold in 2021. The traditional safe haven could reach new highs amid a flurry of stimulus packages and uncertainty in the broader equity markets.
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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 Vineet Kulkarni has no position in any of the stocks mentioned.