While it may not be an apt analogy, there might be a correlation between shopping and buying stocks. When you are out in the market looking for some discounted goods, you don’t want to buy the most discounted item; you want to buy something that you need or want at a discount. There is a big difference between the two.
Similarly, when you are looking for undervalued stock, you don’t just want to grab the best value deal available. You should consider buying stocks that pack the most return potential, either through growth, dividends, or both. That’s easier to do during a market crash or a recession when almost every stock is on discount, but in a strong market, you have to make do with what you have.
Still, you might be able to find some undervalued gem with a decent amount of potential if you look hard enough.
A commercial real estate company
Madison Pacific Properties (TSX: MPC) develops, owns, and operates a portfolio of commercial properties in Western Canada. The asset classes it focuses on are industrial, office, and retail properties. Its portfolio is spread out over three provinces, British Colombia, Alberta, and Ontario. It has a total of 46 properties, 34 of which are industrial, and nine are retail properties.
The stock grew about 50% in the last 12 months, and despite a relatively consistent growth, it hasn’t gotten overpriced yet. It’s trading at a price-to-earnings of 8.8 and a price-to-book of just 0.8 times. This underpriced gem offers both dividends (at a 2.2% yield) and modest capital growth prospects (10-year CAGR of 13.1%). At its current valuation and price, Madison might be a very attractive value investment.
A management company
AGF (TSX: AGF.B) is a Toronto-based asset management firm that has been operating since 1957. With decades of experience and a track record backing it up, and a globally diversified portfolio of assets, AGF has the potential to be a solid investment. The company has $39.8 billion worth of assets under management. Its four lines of business are Mutual funds, ETFs, private clients, and alternatives.
The stock has already grown higher than its pre-pandemic valuation, and it grew about 77% in the last 12 months. The company offers a juicy 4.2% yield, and it’s currently quite undervalued. It has a five-year CAGR of 14%, and if the company keeps growing at its current pace, it might offer you decent returns via both dividends and capital growth.
Foolish takeaway
Not every undervalued stock is worth considering, but companies that might have a modestly bright future ahead of them can offer you better returns (if bought undervalued) than relatively more powerful growth or dividend stocks bought at a high price. How long you are planning to hold on to a stock is also an important factor to consider. An undervalued stock with long-term growth potential can be transformative for your portfolio if you hold on to it for decades.
