These two value stocks could be big winners over the next 12 to 36 months. Both appear to be well positioned for growth over the next few years. However, one stock is a riskier investment.
NFI Group stock
NFI Group (TSX: NFI) stock has lost half of its value from the pandemic high. Apparently, it’s because it ran into supply chain issues and couldn’t get its hands on essential parts and components.
Interestingly, the company operated at losses in 2020 and 2021, but the consumer discretionary stock still managed to roughly double from where the stock stabilized at about $16 in 2020 to $30 in 2021. Last year, the company took advantage of its strong stock price to raise $150 million in an equity offering and $300 million convertible debentures that have an interest rate of 5.0% per year, a conversion price of $33.15 per common share, and a maturity of January 15, 2027.
Therefore, NFI Group was able to end 2021 with the highest cash position (US$77.3 million) seen in the past few years. Its current ratio and debt-to-asset ratio at the end of 2021 improved from the 2019 levels. So, its balance sheet remains stable.
If you believe the international internal combustion engine and electric bus maker will recover from the supply chain issues, you can consider buying the value stock now.
At writing, it trades at $14.87 per share, which is a discount of 21% from the 12-month analyst consensus price target of $18.92 according to Yahoo Finance. If the cyclical stock returns to $30, that will double investors’ money from current levels — a target that could take a few years to achieve.
Magna International stock
NFI Group pays a dividend, but it has cut it in the past during difficult periods, such as in 2020 during the onset of the pandemic. In comparison, Magna International (TSX: MG)(NYSE: MGA) has been a stronger dividend payer. Magna stock has increased its dividend every year since 2010.
In 2020, global auto part maker Magna remained profitable, although its net income dropped significantly by 57% versus in 2019. Because it maintains a low payout ratio, it was able to keep its dividend safe. Its 2020 payout ratio ended up being approximately 41% of earnings and 25% of free cash flow.
After the dividend stock stabilized at $60 in 2020, it doubled investors’ money by mid-2021. Since then, it has corrected and reverted to the mean. At $78.22 per share at writing, it trades at close to its long-term normal valuation at about 11.5 times its earnings.
In other words, it’s reasonably priced. The Canadian Dividend Aristocrat also yields about 2.9%. Again, the dividend appears to be safe because of the low payout ratio. Its payout ratio is estimated to be about 31% of earnings and 42% of free cash flow this year.
Analysts think the cyclical stock is undervalued and can appreciate approximately 44% over the next 12 months. Over the next few years, it can potentially appreciate 62%.
The Foolish investor takeaway
Between the two, NFI Group is a higher-risk investment, but it can deliver stronger upside if things work out. Conservative investors looking for a safer value stock should consider Magna stock instead. It’s lower risk and can still deliver annualized returns of 15-20% over the next few years.
