The U.S. market is getting pretty frothy these days, so much so that U.S.-based investors may be inclined to do some bargain hunting north of the border. There are too many battered Canadian value stocks to count. It’s pretty strange to witness the TSX Index flirting with new highs, while many unloved Canadian bargains are sitting on the sidelines.
In this piece, we’ll have a look at two of the cheapest stocks that are so unbelievably cheap that value investors may think there’s a catch. Undoubtedly, value traps have led many new investors to their demise. It can be tough for newbies to tell the difference between a deeply discounted value stock and a “cheap” stock that’s en route to become even cheaper.
That’s why it’s worthwhile to put in the extra homework in a deep-value play to ensure there are no pieces of hair or flies in the ointment that you may not have seen initially.
Bargain hunters: Ice-cold value stocks in a red-hot market
In this piece, we’ll have a closer look at two of the cheapest stocks on the TSX these days based on traditional valuation metrics. Each name, I believe, is actually undervalued and not just bracing for an unfavourable environment that could bring forth earnings multiple expansion and considerable pain for contrarians.
Enter Cascades (TSX: CAS) and IA Financial (TSX: IAG), two unloved Canadian stocks with single-digit price-to-earnings (P/E) multiples alongside attractive dividend yields of 2% and 2.9%, respectively.
Cascades: One of the cheapest Canadian stocks
Cascades is a tissue product manufacturer that makes good use of recycled fibres. Undoubtedly, tissue and paper towels are an unsexy business, especially in an era where the appetite for speculation is high. Still, I find the steeply discounted multiple, the juicy dividend, and the ESG-friendly nature of the firm to be attractive at current levels.
While demand for such paper products tends to be steady over time, input cost fluctuations tend to bring forth wild swings in the stock. Of late, some pressure has been taken off the shoulders of the paper products plays, Cascades included.
As industry conditions improve and the company continues improving upon its North American operations, I think the stock is unlikely to remain this depressed for a prolonged period.
Today, the stock trades at 7.9 times trailing earnings and 0.3 times sales. There’s cheap, dirt cheap, and Cascades cheap. With a near-zero beta, I think Cascades is one of the most opportunistic defensive value options in today’s rocky market.
IA Financial: Deep value in the financial space
IA Financial is one of my favourite non-bank insurers in Canada. In prior pieces, I’ve noted that many Canadians like the discounted the stock for its below-average dividend yield (just shy of 3%) and its modest growth profile. Undoubtedly, there are sexier and growthier options in the insurance space. But if you’re all about margin of safety, I’d argue that it’s tough to stack up against IA shares at $66 and change.
The stock trades at 9.6 times trailing earnings and 0.5 times sales, one of the lowest admission prices into a 3% yielder these days. While the 1.46 beta implies IA stock is more volatile than average, it’s important to remember that volatility doesn’t necessarily imply risk. The depressed valuation suggests a pretty wide margin of safety on a name that’s proven repeatedly that it’s one of the more conservative players in its corner of the financial arena.
