Thanks to a stellar recovery rally, most of the top Canadian stocks are looking expensive on the valuation front. However, shares of a few fundamentally strong companies are still trading at big discounts compared to their peers and present a good buying opportunity at the current price levels.
Here are three undervalued Canadian stocks that you could consider buying in February for outsized gains.
Bank of Montreal
Banks are likely to gain big from the expected economic expansion in 2021. The economic reopening and revival of consumer demand are likely to drive credit growth and support the revenues and earnings of banks.
While bank stocks have shown a sharp recovery, Bank of Montreal (TSX:BMO)(NYSE:BMO) stock is trading at an attractive valuation multiple than its peers. Bank of Montreal stocks trades at a price-to-book value multiple (P/BV) of 1.2, reflecting a discount of about 37% compared to the Royal Bank of Canada’s P/BV of 1.9. Meanwhile, Bank of Montreal stock trades at a discount of about 20% compared to the peer group average.
I believe higher loans and deposit volumes are likely to drive Bank of Montreal’s revenues in 2021. Meanwhile, improving efficiency and lower provisions are expected to cushion its profitability. Improving operating environment and earnings growth are likely to drive its dividends in 2021. Bank of Montreal has been paying dividends for a very long period (about 192 years) and offers a high yield of over 4.4%.
Capital Power (TSX:CPX) is another stock looking very attractive on the valuation front. Shares of the utility company are trading at a forward EV/EBITDA multiple of 8.9, which is about 36% lower than Algonquin Power & Utilities’s EV/EBITDA multiple of 14. Moreover, Capital Power is trading at a discount of about 23% compared to the peer group average of 12.2.
Notably, Capital Power operates a low-risk business that generates strong cash flows. Capital Power’s high-quality assets and power-purchase agreements position it well to deliver healthy growth in 2021 and drive its dividend payments.
Besides trading at a discount, Capital Power is also a Dividend Aristocrat, implying that it has consistently boosted its shareholders’ returns with higher dividend payments over the past several years. Capital Power pays an annual dividend of about $2.05 a share, translating into a high yield of 5.5%. With its stable business and growing contracted assets, Capital Power is likely to continue to increase its dividends in the coming years. As for 2021, Capital Power projects a 7% hike in its annual dividends.
Kinross Gold (TSX:K)(NYSE:KGC) is another top TSX stock trading at a significant discount when compared to peers. Shares of the Kinross Gold are trading at a forward EV/EBITDA ratio of 3.7, reflecting a discount of about 41% compared to Barrick Gold’s forward EV/EBITDA multiple of 6.3. Further, it is trading a discount of about 35% compared to the peer group average of 5.7.
While Kinross Gold offers excellent value, its production is likely to increase by about 20%. Meanwhile, the company expects its production cost to trend downwards over the next three years.
Higher production and lower costs are expected to drive its margins and profitability in 2021. Also, Kinross Gold has reinstated its dividend payments, which reflects the strength of its cash flows. Kinross Gold currently offers a decent yield of 1.7%.
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Fool contributor Sneha Nahata has no position in any of the stocks mentioned.