3 Undervalued Companies That May Break Out in the Right Market

Many discounted and undervalued stocks require certain market conditions to break out from the rut, and you have to wait for those conditions to turn a profit.

Not all undervalued companies may have the potential for exceptional growth in the long term or when the market conditions are right, but some do, and these are the gems you should look for. Buying an undervalued stock just because of the bargain (in price or value) it offers may not be the wisest course of action.

A REIT

Even though many real estate investment trusts (REITs) are discounted right now, few are as devastated as Minto Apartment REIT (TSX:MI.UN). It’s currently trading at a massive 38% discount from its 2021 peak and a 44% discount from its pre-pandemic peak.

Despite the sharp fall, the REIT only offers a modest 3.1% yield. But it’s growing its payouts every year since its inception, and the payout ratio has never even crossed 20%, making the dividend incredibly stable.

But even more promising than its steady dividend is its capital-appreciation potential that hasn’t adequately manifested since the 2020 crash. Before the pandemic, the REIT stock was going up at a decent pace, but since the crash, it has struggled to regain this pace.

But its financials are strong, and a similarly proportional undervaluation accompanies the price discount, so the REIT might be at the right turn for growth once the market stabilizes.

A gold stock

In 2022, gold stocks hadn’t followed the typical pattern of staying strong when the market was weak, and many fell much harder than the market did in April. One example would be Centerra Gold (TSX:CG)(NYSE:CGAU), which has lost over 54% since its mid-April valuation. Since it’s a dividend payer, this fall has resulted in a substantial rise in the yield, which is currently at 4.6%.

The stock is also undervalued right now as the price-to-earnings ratio is just 3.5. For a company like Centerra, the right market “condition” would be when the rest of the sector is rising. At its current price of $6 per share, the stock might easily double your investment if it starts following a bullish trend in the gold sector and reaches its recent peak. The gains may increase if it touches or outgrows its 2020 peak.

An EV stock

The right market for electric vehicles (EVs) is already here, but only if you take a relatively long-term view. EVs are facing several challenges, some technological and others tied to macro factors like uncertainty in the energy sector. These challenges are driving stocks like Lion Electric (TSX:LEV)(NYSE:LEV) down into the ground. The stock is relatively new, and its road has mostly been downhill since its inception in May 2021.

But as an innovative zero-emission vehicle (ZEV) company targeting mass transport, specifically school buses, it has the potential to rise.

Local governments in both Canada and the U.S. may start taking green initiatives, like moving on to a ZEV fleet, and if Lion Electric gets a few large contracts, it may see its financials and stock go up. This business model also makes it an intelligent choice from an ESG (environmental, social, and governance) investing perspective.

Foolish takeaway

The three undervalued companies that are also adorned with a decent discount tag right now can be transformative for your portfolio when the right market conditions are in place. And if they deliver on the more optimistic growth projections, you may see amazing returns, even if you factor in the time you may have to hold them while they underperform the market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends CENTERRA GOLD INC.

More on Investing

Piggy bank in autumn leaves
Dividend Stocks

CPP Pensioners: You’re Getting an Inflation Increase in 2025

CPP benefits increase with inflation, but this stock's dividends can outpace even that.

Read more »

Middle aged man drinks coffee
Retirement

Here’s the Average RRSP Balance at Age 54 for Canadians (and How to Boost Yours)

Are you on track for a comfortable retirement? See how your savings stack up.

Read more »

Circuit board with glowing lines
Investing

AI Investors: 2 ‘Sleep Easy’ Dividend Stocks to Buy in October

Fortis (TSX:FTS) stock and another top dividend play that could be a nice fit for AI investors looking to diversify…

Read more »

AI powered robotic finger touching human finger
Investing

What Is Artificial General Intelligence (AGI)?

An AGI system would be capable of thinking and reasoning the way that humans do without the need for human…

Read more »

coins jump into piggy bank
Dividend Stocks

Invest $15,000 in This Dividend Stock for $61 in Monthly Passive Income

Monthly passive income is well within reach, especially when you have a solid dividend stock like this on hand.

Read more »

RRSP (Registered Retirement Savings Plan) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

RRSP: 2 Reliable Canadian Dividend Stocks to Own for Decades

These stocks offer high yields and a shot at decent capital gains.

Read more »

concept of real estate evaluation
Dividend Stocks

Invest $7000 in This Dividend Stock to Make $600 in Passive Income

Looking to make monthly passive income? Timbercreek Financial (TSX:TF) stock's 8.6% dividend yield could turn into a steady stream of…

Read more »

woman analyze data
Investing

3 Top Stocks to Buy in October for Value-Hunting Canadians

Given their healthy long-term growth potential and discounted stock prices, I am bullish on these three TSX stocks.

Read more »