The equity markets are trading near record highs, which means it’s difficult to find stocks that are available at a reasonable valuation. However, you can look at sectors such as financial services and energy that have underperformed the equity markets in the last year.
I have identified three TSX companies that are undervalued and should outpace the broader markets in 2021.
Manulife Financial
The largest insurance company in Canada, Manulife Financial (TSX:MFC)(NYSE:MFC), should be on the radar of most investors right now. The stock is trading at a forward price-to-earnings multiple of 8.4, which is really cheap given its earnings is forecast to grow at an annual rate of 18.5% in the next five years. Further, Manulife Financial also has an attractive forward yield of 4.2%.
Manulife is a top-quality, long-term bet given its leadership position in Canada as well as its diversified distribution platform, prudent risk management, and a diverse portfolio of solutions.
The company’s management expects its earnings per share to grow at an annual rate of between 10% and 12% in the near term. Further, the company aims to keep the dividend-payout ratio below 40%, which makes consistent earnings growth a sustainable reality right now.
In the December quarter, Manulife’s net income was up $0.6 billion at $1.8 billion, while net income soared to $5.9 billion for 2020 compared to $5.6 billion in 2019. Despite a volatile year, the company’s global wealth management division experienced inflows of $8.9 billion.
TC Energy
Canadian midstream giant TC Energy (TSX:TRP)(NYSE:TRP) has managed to increase its dividends for the last 21 consecutive years. It still has a forward yield of a tasty 5.7%, making it extremely attractive for income investors.
TC Energy has a diversified base of cash-generating assets and operates one of North America’s largest natural gas pipeline networks. The company transports around one-fourth of the total natural gas consumed in North America.
Its contract-based business model allowed TC Energy to increase its net income from $4 billion in 2019 to $4.5 billion in 2020. In the current year, the energy giant expects to complete $4.2 billion of projects, which will drive future cash flows higher and help it support dividend increases as well.
TC Energy aims to grow its dividends between 5% and 7% going forward. Its robust asset base, predictable cash flows, and solid pipeline of projects suggest the company is well poised to achieve its financial goals.
Methanex
Methanex (TSX:MEOH)(NYSE:MX) is one of the largest producers and suppliers of methanol in the world. It also purchases methanol produced by other companies under offtake contracts. Further, the company also owns and leases storage and terminal facilities as well as a fleet of 30 ocean-going vessels.
Methanex stock is valued at a market cap of $2.92 billion, which means its forward price-to-sales multiple is 0.84. The stock is also trading at a forward price-to-earnings multiple of 13.3, while its earnings are forecast to grow at an annual rate of 29% in the next five years.
Its sales volume of 10.7 million tonnes in 2020 accounted for 13% of global methanol demand. Its leadership position allows Methanex to meet customer demand across international markets.
Methanex has a strong balance sheet and enough liquidity with no near-term obligations to navigate a sluggish macro-environment.
