Despite Canadian equity markets recovering strongly from their March lows, few Canadian stocks are still trading at a discount and provide excellent buying opportunities. Amid the expectation of recovery in demand and improvement in economic activities, investors are looking at rotating their portfolios by replacing their expensive stocks with undervalued stocks. So, I believe these three undervalued TSX stocks can deliver superior returns in 2021.
Suncor Energy
The pandemic-infused lockdown had led oil demand and prices to decline, dragging Suncor Energy’s (TSX:SU)(NYSE:SU) financials and stock prices down. However, oil prices have bounced back, with WTI crude trading above $60 per barrel amid supply cuts and economic activities improvement. Further, the deep freeze has led to a shutdown of many production facilities in the United States. The improvement in oil prices could benefit Suncor Energy, which operates an integrated business built to capture the barrel’s full value.
Further, the company’s management also expects its operating metrics to improve in 2021. Following its maintenance activities in 2020, the management expects its production to increase by 10% this year, while its operating expenses could fall around 8%. Further, the utilization rate of its refineries could improve by 6% to 93%. The management has also planned to repurchase $500 million worth of shares this year.
Despite the strong recovery in its stock price, Suncor Energy still trades around 33% lower than its 52-week high. Further, it is trading at a forward price-to-sales and price-to-book multiples of 1.3 and 1.1, respectively. So, given the favourable oil prices, improving operating metrics, and attractive valuation, I believe Suncor Energy could deliver superior returns this year.
Air Canada
The pandemic-infused travel restriction has severely dented the passenger airline industry, including Air Canada (TSX:AC). Amid lower passenger demand, its revenue had declined by 81.3% during the fourth quarter. Lower sales continue to be a drag on the company’s bottom line, as its net losses widened to $1.15 billion compared to $685 million in the third quarter. Further, the company burnt around $1.4 billion of cash during the quarter.
Despite multiple vaccination rollouts, the widespread distribution will not happen soon, which could negatively impact Air Canada’s performance. However, the company’s management has taken several cost-cutting measures, such as lowering its operating capacity to 15% of its previous year’s quarter, slashing its workforce, and permanent retirement of 79 older aircraft, which could reduce its losses. Meanwhile, the company’s cargo business is performing well since its launch in March last year and offers strong growth prospects.
Despite its near-term challenges, I believe the company’s long-term growth prospects remain intact. So, investors with over two years of investment horizon could buy the stock for superior returns.
Restaurant Brands International
The pandemic has deeply hurt quick restaurant operator Restaurant Brands International (TSX:QSR)(NYSE:QSR), which currently trades at around 29% lower than its all-time high. In the recently reported fourth-quarter earnings, its top line declined by 8.2% from its previous year’s quarter, while its adjusted EPS declined by 29.3%. The decline in same-store sales across the three brands due to temporary closures and restrictions has put pressure on its financials.
However, the company’s investments in expanding its digital channels, such as drive-thru and delivery services, have helped mitigate some of the losses. Restaurant Brands International’s digital sales in Canada more than doubled in 2020 while reaching US$6 billion globally. These investments could drive the company’s sales, even in the post-pandemic world.
Further, the widespread distribution of vaccines could prompt governments to lift restrictions, allowing Restaurant Brands International to operate at full capacity, improving its margins. As of December 31, 96% of the company’s restaurants were open. The company has raised its quarterly dividends for the ninth consecutive year to $0.53 per share, representing a forward dividend yield of 2.8%.
