Canadian stocks continued to march higher amid economic recovery recently. However, some of them went too far too fast and might turn weak in the short to medium term. Here are two of the TSX stocks that look expensive from the valuation standpoint at the moment.
BlackBerry (TSX:BB)(NYSE:BB) stock has fallen more than 30% since last month. It has been one of the target stocks of Redditors that led to such a brutal fall. But importantly, BB stock does not look attractively valued, even after such a steep correction. It is currently trading at a price-to-sales valuation of 10, suggesting more downside in the near future.
BlackBerry is indeed working around many high-growth areas. However, it has failed to translate that into financial growth. The company posted US$2.1 billion in revenues in 2016, but they fell to US$893 million in fiscal 2021. With such falling top-line growth, long-term sustainable profit growth looks like a distant dream, at least for now.
BlackBerry’s QNX platform could be a game changer for the company. It is a software platform for cars that provides driver assistance, infotainment systems, and connectivity modules. It is already installed in more than 195 million cars globally. With the advent of electric and autonomous vehicles, BB could start a new growth chapter in the next few years. But right now, BB stock looks overvalued, and investors could wait for more correction.
Cineplex (TSX:CGX) stock is up almost 40% so far this year. However, I think investors are overly optimistic about the theatre chain company. While reopening is certainly positive news for Cineplex, it could take years for it to reach decent profitability levels.
In the last 12 months, Cineplex reported $177 million in total revenues. It was a 90% decline against its 2019 top line. Even if restrictions wane post-pandemic, the financial wound is significantly deep for Cineplex and will likely take time to heal. Additionally, over-the-top online platforms swooped in amid the pandemic and have created strong headwinds for theatre companies.
Cineplex reported a $540 million loss in the last 12 months. It suspended shareholder dividends last year to retain cash. However, it will be a while till Cineplex gets back in a position to resume dividends.
CGX stock is currently trading at a price-to-sales ratio of five. Although that might not seem exorbitant, I think the challenges far outweigh its growth prospects.
So, what can long-term investors buy?
Consider Toronto-Dominion Bank (TSX:TD)(NYSE:TD). Top Canadian banks saw a decent earnings recovery in the last few quarters. In addition, Toronto-Dominion is one of the banks that is flush with cash, which will likely go to shareholders in the form of higher dividends. The stock has returned around 40% in the last 12 months.
Also, TD Bank stock looks attractively valued. The economic recovery post-pandemic and stable earnings growth could fuel the stock further higher. It yields 3.8% at the moment, which is in line with the industry average.
Instead of assuming higher risk with overvalued stocks like BB and CGX, Toronto-Dominion stock offers favourable risk/reward prospects to long-term investors.
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.
The Motley Fool recommends BlackBerry and CINEPLEX INC. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.