3 Cheap Bets With Great Odds

One of the main reasons to seek rundown stocks to invest in is that you might be able to benefit from the upside of the company’s recovery to the peak.

| More on:
stock research, analyze data

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

When the market is strong and businesses are thriving, the asset pool, which contains undervalued yet promising stocks, is relatively smaller. However, if you combine it with the pool of “discounted stocks,” that is, those trading at a significant discount to their recent peaks, you might have access to a lot more assets. With more options available, your chances of finding a winner are relatively high.

There is another benefit of making “cheap bets,” however. Even if the stock is not a grower per se, you might still see some capital appreciation thanks to the recovery trajectory/momentum of the stock.

An undervalued stock

United Corp (TSX:UNC) is a Toronto-based company with a market capitalization of $1.29 billion. It has been around since 1929 and is a closed-end investment corporation with net assets of about $1.68 billion and a management expense ratio of 0.75%. As per the company, its shares have traded at a 15% to 40% discount from its net asset value for the last decade.

The company has outperformed the S&P/TSX Composite Index by a significant margin in the last 10 years, but not the S&P 500 Composite Index. It’s currently trading at a price-to-earnings of about three and price-to-book of 0.6 times, making it an attractively undervalued stock. And even though the company might offer some capital appreciation, it would require a holding period of decades, not years.

A renewable energy stock

Renewables are the next big thing, which makes stocks like Innergex Renewable Energy (TSX:INE) attractive thanks to the nature of its business. But another reason to consider this stock is its massive fall from the yearly peak. The stock is trading at a 30% discount from its peak valuation and is already showing signs of growing out of the slump.

It’s quite expensive from a valuation perspective, but if you consider the fact that thanks to its current slump, the stock is again in line with what its valuation trajectory would have been if the market crash and subsequent recovery didn’t throw it off tracks, the stock looks ripe for buying. The recent fall has also grown the yield to a more attractive number of 3.2%.

An industrial equipment company

Another company that has fallen hard from its after-crash peak is Ritchie Bros Auctioneers (TSX:RBA)(NYSE:RBA). The stock peaked in Nov 2020, and it’s now down 24% from that price point. It’s not as overvalued as INE, but it’s still relatively expensive. It also comes with the title of dividend aristocrat and has grown its dividends for 18 consecutive years.

As the world’s largest auctioneer of heavy equipment and truck, RBA has carved a big piece of a niche industrial market for itself. The company has been in business for over six decades and has catered to over 10,000 customers. They sell machinery and equipment from some of the most well-known names in the heavy equipment industry, including CAT.

Foolish takeaway

Not every undervalued or discounted stocks are worth buying. Sometimes, the stocks fall, never to rise again to their peak valuations. But on other occasions, a discounted stock is primed for a powerful recovery, enough to add some decent capital appreciation to your portfolio. Your goal is to find the winners in the bear market.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

funds, money, nest egg
Dividend Stocks

TFSA Passive Income: 2 Great Canadian Dividend Stocks for Retirees to Buy Now

Retirees seeking reliable passive income can now buy top TSX dividend stocks at cheap prices.

Read more »

data analyze research
Dividend Stocks

Earn Monthly Passive Income: 2 Hot Dividend Stocks in Canada to Buy Now and Hold Forever

These two hot dividend stocks could help you to earn stable monthly passive income in Canada.

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Be a Landlord: Top 2 REITs (With Monthly Dividends) I’d Buy and Forget

You can be a landlord and earn monthly dividends for the rest of your life. All you need is the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Got $5,000? 3 Stocks to Hold for the Next 20 Years

New investors don’t need tens of thousands to start a portfolio. Here are three stocks to hold for the next…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

Earn $370 Every Month with These 3 Dividend Stocks

These three Canadian dividend stocks could boost your passive income.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

3 Dividend Stocks to Buy Hand Over Fist

Investing in dividend stocks could help you reach a comfortable retirement. Here are three stocks to start buying hand over…

Read more »

Retirement plan
Dividend Stocks

4 Stocks That Could Turn $100,000 Into $500,000 by the Time You Retire

Companies such as Brookfield Asset Management have the potential to consistently beat the broader markets and deliver stellar returns to…

Read more »

money while you sleep
Dividend Stocks

Need Passive Income? 2 TSX Stocks to Earn $500/Month Without Losing Sleep

By investing in Enbridge and Keyera stock, investors can make $500/month.

Read more »