Although markets have come far from their lows and are currently trading close to record levels, some TSX stocks are trading way below their fair values. Value-conscious investors will likely find these names attractive amid rising inflation.
Vermilion Energy
Small-cap energy stock Vermilion Energy (TSX: VET)(NYSE: VET) zoomed to profits in the last 12 months after taking a deep dent in 2020. The oil and gas price recovery drove Vermilion stock, rallying a notable 175% since last year. However, VET stock is currently trading at four times its earnings, despite such massive gains. This looks highly discounted relative to the industry average.
Importantly, a sustained rally in energy commodities could facilitate dividend resumption for Vermilion this year. In addition, a superior free cash flow in 2022 will also enable debt repayments, ultimately improving its balance sheet strength.
This has been the widely followed trend in the industry so far. Energy companies have prioritized improving balance sheet strength and dividend hikes since 2021, and capital investments have taken a back seat.
VET stock has soared 550% since September 2020. However, it is still trading well below the record $73 prior to the 2014 crisis. Since then and after the pandemic, the oil and gas sector has seen a paradigm shift. However, strength in energy commodity prices could be well reflected in energy stocks this year and beyond.
Shopify
Canadian tech giant Shopify (TSX: SHOP)(NYSE:SHOP) does not look cheap from the traditional valuation measures. However, the recent fears of higher rates have weighed on the stock substantially and have brought it down 35% since November. Its recent weakness could be an opportunity for long-term investors.
SHOP stock has created solid wealth for shareholders, returning 1,800% in the last five years. It continues to offer attractive growth prospects, given higher contributions from Payments and Capital segments coupled with higher spending on e-commerce.
SHOP is currently trading 50 times its earnings. The premium seems justified considering Shopify’s healthy growth prospects and stupendous historical performance.
BRP
Canadian Powersports vehicle stock BRP (TSX: DOO)(NASDAQ: DOO) has been trading weak for the last few months. Since October 2021, the stock has fallen almost 20%, following other growth stocks. However, the management has kept its upbeat earnings guidance intact. BRP stock returned 22% in the last 12 months, largely tracking the TSX stocks at large.
The management expects a normalized earnings growth of 75% for the fiscal year 2022 relative to 2021. Such a high-growth stock is trading 10 times its earnings and, thus, looks attractive. Once Omicron fears fade and tourism gains steam, BRP could see solid demand growth, driving its revenue growth.
BRP already has a strong position in the global Powersports vehicle market. Tourism will likely be one of the biggest beneficiaries of consumer discretionary spending surge when restrictions wane.
BRP’s product mix, which includes Sea-Doo and Ski-Doo, should drive stellar revenue growth in the post-pandemic world. Such a fundamentally robust stock with strong growth prospects at a discounted valuation looks like a steal right now.
