Despite the strong rally in the Canadian equity markets over the last nine months, we can still find few undervalued stocks that can deliver superior returns over the next three years. We will look at three such companies in this article.
Kinaxis
Kinaxis (TSX: KXS) provides cloud-based solutions that aid supply chain companies in planning and decision making. Since going public in June 2014, the company has delivered strong returns of around 1,300%, driven by growing demand for its products and services. In the first three quarters of 2020, its top line grew 25.1% year over year, while its adjusted EBITDA increased by 20.4%.
Meanwhile, the rally in Kinaxis’s stock price could continue, given its high growth prospects. The company has projected the supply chain management solutions’ market to grow at an annualized rate of 22.4% from 2017 to 2022. Further, most of Kinaxis’s customers have signed long-term agreements, while its backlog revenue stands at US$364.7 million, indicating continued growth.
Kinaxis could also benefit from a structural shift toward online shopping and growing e-commerce sales. The company is expanding its product portfolio by adding innovative solutions, which could help the company acquire new customers and increase average revenue per customer. Despite these growth prospects, the company trades at 19.3% lower than its 52-week high, providing an excellent buying opportunity.
Barrick Gold
Since Pfizer‘s announcement about the effectiveness of its vaccine in preventing the spreading of COVID-19 on November 9, Barrick Gold (TSX: ABX)(NYSE: GOLD) had lost over 20% of its stock value. The expectation of life returning to pre-pandemic ways amid the vaccine rollout led investors to move away from safe heavens, such as gold to risky asset classes, dragging gold prices down. The correction in gold prices caused gold mining companies’ stock prices, including Barrick Gold, to fall.
Meanwhile, the rising COVID-19 cases, the slowdown in economic recovery, and the weaker United States dollar could drive gold prices higher, benefitting Barrick Gold. The company has increased its gold production by ramping up its mining operations. Copper is also a major source of revenue generator for the company. With the improvement in economic activities, copper’s demand could rise, driving the company’s financials.
Barrick Gold has also strengthened its balance sheet by significantly reducing its debt levels through its robust cash flows and sale of its non-core assets. Its valuation also looks reasonable, with its forward price-to-earnings ratio standing at 21. The company pays quarterly dividends of $0.09 per share, representing a dividend yield of 1.2%.
Suncor Energy
Although Suncor Energy (TSX: SU)(NYSE: SU) has witnessed a strong buying since November 9, the company still trades around 45% lower than its pre-pandemic price, providing an excellent buying opportunity. Its valuation also looks attractive, with its price-to-book and forward price-to-sales ratios standing at 0.7 and 0.9, respectively.
Suncor Energy’s management expects that its business could sustain and also pay dividends, even if WTI crude trades just below US$40 per barrel, thanks to its integrated business model and long-life, low-decline assets. With WTI crude trading well above $50, I expect the company to deliver robust numbers in the coming quarters. The company also expects its overall production to increase by 10% in 2021, while its operating expenses could fall by 8%. Its downstream utilization rate could rise to 93%, which is encouraging.
Amid the steep fall in oil prices last year, Suncor Energy had slashed its dividends. However, its dividend yield currently stands at a healthy 3.7%. Given its improving operating metric, rising oil prices, and attractive valuation, I believe Suncor Energy could deliver oversized returns this year.
