3 Canadian Stocks That Are Value Traps

Baytex Energy (TSX:BTE)(NYSE:BTE) stock is a classic value trap.

| More on:

Value investors love a good bargain. Seeing cheap stocks as undervalued opportunities, they like to buy them up before they recover. And until recently, they were right. For most of the 20th century, value investing outperformed other strategies, according to numerous studies. Notably, the most famous investor of all time, Warren Buffett, employed the strategy. As did many other market-beating money managers like Li Lu and Ben Graham.

But recently, value investing has lost its lustre. With the rise of FAAMG and innovator stocks, value stocks have fallen out of favour. This condition may not be permanent, but it has been the case for at least a decade. With that in mind, here are three “value trap” stocks that I personally would avoid.

Air Canada

Air Canada (TSX:AC) is a value stock by at least one metric. It has a price-to-sales ratio of just 2.34, which is pretty low for stocks these days. Traditionally value investors looked for price-to-sales ratios of two or less, but they’re hard to come by in today’s market. By 2021 standards, AC’s price-to-sales ratio is low.

With that said, most of the stock’s other value metrics are poor. Its price to book ratio of 14 is quite high, it has negative earnings, and it faces a number of risk factors, including:

  • The Delta Variant of COVID-19
  • Rising debt
  • Bad publicity
  • And more.

Based on the price/sales ratio, Air Canada looks like it could be a good value–particularly if sales increase and earnings turn positive. Unfortunately, there are too many risk factors at play now to just assume that Air Canada will turn out positive earnings in the near future.

Baytex Energy

Baytex Energy (TSX:BTE)(NYSE:BTE) is another TSX stock with some good value metrics. These metrics include:

  • A 1.93 price to sales ratio.
  • A 1.32 price to book ratio.
  • A 1.74 P/E ratio.

The P/E ratio being lower than the price/sales ratio appears to be due to hedging strategies the company uses, which can result in unrealized gains. With that said, the price/operating cash flow ratio (about five) is extremely low as well.

This stock certainly looks like a rock-bottom value. The problem is that it is very dependent on high oil and gas prices. The stock was tumbling into the abyss from 2014 until earlier this year, as the price of oil was weak then. More recently the stock has been rallying on higher oil prices. This has worked out well so far, but if the price of oil starts collapsing again, BTE is going down with it.

Canadian Imperial Bank of Commerce

The Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) is a Canadian bank stock with very attractive value metrics. Trading at 10.5 times earnings, 3.5 times sales, and 1.6 times book value, it definitely looks cheap. The stock also has respectable earnings growth of 7.8% annualized over the last five years.

This stock is not a value trap in the sense of being an actively bad investment. I actually expect this stock to rise modestly over the long term. The “trap” in this case is the fact that the stock is limited compared to other alternatives. While CM trades at similar multiples to other Canadian banks, it has much less growth potential because its operations are so concentrated in Canada.

Whereas other Canadian banks are growing in the U.S. and other foreign markets, CM mostly sticks to its home turf. So it has less growth potential due to its geographic limitation.

Fool contributor Andrew Button owns shares of The Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned.

More on Bank Stocks

pregnant mother juggles work and childcare
Bank Stocks

A Canadian Stock That Could Create Lasting Generational Wealth

TD Bank (TSX:TD) stock looks like a great bet for dividend lovers over the next 50-plus years.

Read more »

builder frames a house with lumber
Dividend Stocks

2 Canadian Stocks Built to Be TFSA Cornerstones Through a Volatile Market

A TFSA cornerstone should be something you can hold for years because the business keeps earning through good markets and…

Read more »

staying calm in uncertain times and volatility
Dividend Stocks

Rate Cuts Aren’t Here Yet. These 3 TSX Stocks Don’t Need Them.

Canadian income stocks that earn through a BoC rate hold can gain more when cuts arrive.

Read more »

man in bowtie poses with abacus
Dividend Stocks

Here’s What Average 25-Year-Olds Have in a TFSA and RRSP Account

At 25, you don’t need a huge TFSA or RRSP balance to get ahead, you just need to start.

Read more »

Bank of Canada Governor Tiff Macklem
Dividend Stocks

The Bank of Canada Speaks Up Again: Here’s What to Buy for a TFSA Now

With rates steady, a balanced TFSA can blend dependable income, a discounted yield opportunity, and long-run growth.

Read more »

young people dance to exercise
Dividend Stocks

Canadians: How Much Should Be in a 20-Year-Old’s TFSA to Retire?

At 20, having any TFSA savings matters more than the size, because consistency is what compounds.

Read more »

crisis concept, falling stairs
Dividend Stocks

2 Canadian Stocks That Get Better Every Time the Bank of Canada Cuts Rates

Falling rates can revive “rate-sensitive” stocks by easing refinancing pressure and lifting what investors will pay for cash flows.

Read more »

open bank vault
Bank Stocks

What to Know About Canadian Bank Stocks in 2026

Investors need to be careful when buying the recent pullback in bank stocks.

Read more »