Value stocks have outperformed growth stocks since last year. This year as well, the stage seems set where valuations will be a key driver for shareholder returns. Higher inflation and steep rate hikes might weigh on growth names. At the same time, value stocks will likely steal the show.
MEG Energy
Canadian mid-cap heavy oil producer MEG Energy (TSX: MEG) has had a great start to 2023. While crude oil has dropped 5% so far, MEG stock has gained a handsome 25% this year.
MEG has some of the largest reserve life index among Canadian energy producers. It aims to produce around 100,000 barrels of oil per day this year.
It has seen stellar financial growth and debt repayments since the pandemic. Despite its recent rally, MEG stock is currently trading at a free cash flow yield of 15%. That looks attractive from a valuation standpoint.
Moreover, this year, MEG has been quite aggressive among its peer group on the buyback front. It bought back nearly 2.8 million shares in January 2023 after buying back 20.6 million shares last year. Rapid free cash flow growth will likely fund more buybacks for the rest of the year, likely boosting its share price.
Oil prices are expected to rise later this year when supply woes become more worrisome. That could drive TSX energy stocks higher again. MEG looks particularly attractive based on its valuation, financial growth, aggressive buybacks, and strengthening balance sheet.
BCE
Canadian telecom giant BCE (TSX: BCE) stock is one of the classic defensive stocks. It is a less volatile, consistent dividend-paying name with stable return prospects.
BCE is the largest telecom company by market cap and caters to almost 10 million wireless subscribers. It has upped its capital spending plan ahead of the 5G expansion. BCE aims to invest $5 billion annually on network infrastructure, which will likely grow its subscriber base and fuel topline growth.
It is currently trading 17 times its 2023 earnings and looks relatively undervalued compared to peers. Peer’s average price-to-earnings ratio currently stands at 20.
Telecom companies like BCE grow in the low single digits. However, their safety and juicy dividends make it an appealing name in these volatile markets. BCE yields 6.4%, higher than the industry average. Given its strong balance sheet and valuation, it offers handsome total-return prospects for the long term.
Air Canada
Air Canada (TSX: AC) continued to see a strong path to profitability in its recently released fourth-quarter 2022 earnings. While the impending recession and higher costs in 2023 could further delay its profitability, the stock looks attractively valued.
It is currently trading at an enterprise value to earnings before interest, tax, depreciation, and amortization valuation of five, which is lower than its historical average. South of the border, peer airline stocks are trading at six.
Air Canada’s revenues came in at $16.6 billion last year, representing a sound 160% growth compared to 2021. Its net loss notably contracted to $1.7 billion in 2022 against a loss of $3.9 billion in 2021.
AC has disappointed investors in the last few years due to back-to-back challenges. However, improving demand and efficient operations will likely drive Air Canada toward profitability. Although AC stock might not recover immediately, it looks well placed to outperform in the second half of 2023 or 2024.
