Got $500? 3 Undervalued TSX Stocks for Superior Returns

These undervalued stocks have strong potential for growth and will likely generate superior returns in the long term.

Sneha Nahata

Sneha is a M.Sc. in finance and has been a Motley Fool contributor since mid-2020. Sneha specializes in writing about bank, energy, consumer and TMT (technology, media, and telecom) stocks. She focuses on identifying winning long-term stock picks.

Published June 24, 2022 3:15 pm EDT

After the stellar post-pandemic recovery, TSX stocks lost substantial value. Sharp rise in commodity prices, supply disruptions, rising interest rate environment, and fear of an economic slowdown weighed on stocks, eroding a significant amount of investors’ wealth.

However, the correction in the stock market presents solid investment opportunities as several top TSX stocks are now trading at an attractive value. So, if you can spare $500 cash, consider investing in these value stocks now.

Scotiabank

Due to the recent pullback in bank stocks, Scotiabank (TSX: BNS)(NYSE: BNS) offers good value at current levels. Shares of this banking giant are trading cheaper than its peers and are trading well below their historical average. For instance, Scotiabank trades at a P/BV and forward P/E multiples of 1.3 and 8.9, respectively. These are lower than all its peers. Moreover, these compare favourably to the historical average.

While concerns of an economic slowdown could remain a short-term drag, its exposure to high-quality banking markets, rising interest rates, ability to drive volumes, and focus on productivity savings will likely support profitability. Furthermore, its strong balance sheet and solid credit quality are positives.

The bank also pays a solid dividend. It has been paying dividends for decades. Moreover, its dividend has a CAGR of 6% over the past decade. By investing in Scotiabank stock at current levels, investors can earn a solid yield of 5.4%.

Capital Power

Green energy company Capital Power (TSX: CPX) is another attractive stock to bet on at current levels. Its low-risk business helps generate predictable cash flows, makes it resilient to wild market swings, and supports higher dividend payments.

Capital Power stock trades much cheaper than its peers and offers excellent value. Its forward EV/EBITDA multiple of 7.9 is significantly lower than its peer group average of 12.5. Moreover, it is also lower than its historical average.

Its diversified renewable assets, long-term contractual arrangements, developmental pipeline, and sustainable payout ratio make it a solid value and income stock. Capital Power stock offers a solid dividend yield of 4.9% and plans to increase its future dividends at a healthy pace.

Cargojet

The slowdown in e-commerce growth and general market selling led to a pullback in Cargojet (TSX: CJT) stock. Thanks to the recent pullback, Cargojet stock is trading at a forward P/E multiple of 21, which is significantly lower than its historical average. Moreover, its forward EV/EBITDA multiple of 8.2 also looks attractive.

While the near-term slowdown in e-commerce growth is a challenge, Cargojet’s long-term customer contracts with minimum revenue guarantee support its growth. Moreover, its ability to pass on costs to customers and fuel-efficient fleet cushions its bottom line.

Cargojet’s next-day delivery capabilities to most Canadian households, reduction in aircraft leases and debt, focus on optimizing its fleet size, diversified revenue streams, and international growth opportunities provide a solid base for growth. Moreover, the reacceleration in e-commerce growth will lead to higher revenues for the company. Also, its agreement with DHL will likely support its earnings and cash flows.