Buy These 3 Undervalued Canadian Stocks for Superior Returns

Given their healthy growth prospects and attractive valuations, I am bullish on the following three Canadian stocks.

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Amid rising bond yields and better-than-expected fourth-quarter GDP, investors hope for a strong economic recovery. So, they are looking to rotate their portfolio by selling high-growth stocks and adding more undervalued stocks. Amid the shift in investors’ focus, here are three undervalued stocks that you could buy right now for superior returns.

Canadian Natural Resources

Amid the expectations of rising oil demand due to increased economic activities and supply constraints, oil prices have bounced back strongly to pre-pandemic levels. Higher oil prices could benefit oil-producing companies, such as Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ), which is up 31.4% for the year. Its impressive fourth-quarter performance has also contributed to its stock price growth.

Meanwhile, I expect the uptrend in the company’s stock price to continue amid the expectation of oil prices to remain at higher levels for some more time and improvement in its operating metrics. The company’s management expects its 2021 production to increase by 61,000 BOE/d from its 2020 levels. Further, the management is hopeful of generating $4.9-$5.4 billion of free cash flow this year if WTI crude trades around $57 per barrel. So, the company’s growth prospects look healthy.

The company also rewards its shareholders with quarterly dividends. Its forward dividend yield is currently standing at 4.7%. Its valuation also looks attractive, with its price-to-book multiple standing at 1.2.

Algonquin Power & Utilities

The deep freeze had restricted the electricity production in some of Algonquin Power & Utilities’s (TSX:AQN)(NYSE:AQN) wind farms in Texas. Meanwhile, the company’s management expects the adverse event to lower its 2021 adjusted EBITDA by $45-$55 million. The announcement weighed on its stock price, which is currently trading over 12% lower from its 52-week high. Meanwhile, the company’s long-term growth prospects remain intact.

For fiscal 2021, Algonquin Power & Utilities’s management expects its adjusted EPS to come in the range of $0.71-$0.76, which does not include the deep-freeze impact. Meanwhile, the guidance represents significant growth for its 2020 adjusted EPS of $0.64.

Further, the company has planned to invest around $9.4 billion over the next five years, which could drive its rate base at a CAGR of 11.2%. Boosted by these investments, the management expects its adjusted EPS to grow at a CAGR of 8-10% during the period. The company also pays quarterly dividends with a healthy dividend yield of 4.1%. So, I believe Algonquin Power & Utilities will be an excellent buy right now.

TC Energy

Amid the pandemic-infused lockdown, oil demand plummeted, leading to the underutilization of TC Energy’s (TSX:TRP)(NYSE:TRP) liquid pipeline assets, which weighed on its financials and stock price. In January, U.S. president Joe Biden revoked the permit for the company’s XL pipeline, which has also negatively impacted the company’s stock price. The company currently trades over 14% lower than its pre-pandemic highs. Its forward price-to-earnings and price-to-book multiples also stand at attractive levels of 13 and 1.8, respectively.

Given its high-growth prospects and attractive valuation, I believe TC Energy could deliver superior returns this year. The company is going ahead with its secured growth projects worth around $20.2 billion, which could be completed by 2024. These investments could boost the company’s earnings and cash flows in the coming years, along with organic growth.

TC Energy also raised its 2021 dividends by 7.4% to $3.48 per share, with its forward dividend yield currently standing at 6%. Further, the company’s management hopes to raise its dividends at the rate of 5-7% over the next couple of years. So, I believe TC Energy to outperform the broader equity markets this year.

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 Rajiv Nanjapla has no position in any of the stocks mentioned.

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