Some quality Canadian stocks have come notably down this year. While broad market pressures might continue to weigh on them in the short term, they look attractive from a valuation standpoint and will likely outperform in the long term.
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Tourmaline Oil
Although Tourmaline Oil (TSX: TOU) stock dipped after reporting its fourth-quarter (Q4) 2022 results this week, the numbers, in fact, highlight the company’s stellar growth and a rosy outlook for the future.
Canada’s largest natural gas producer reported record free cash flows of $3.2 billion for 2022, marking a handsome 115% increase year over year. Despite lower natural gas prices in Q4 2022, Tourmaline played relatively well, mainly because of its exposure to premium markets. Plus, its low-cost assets and condensate volumes make it relatively well placed compared to its peers.
Tourmaline paid a total dividend of $7.9 per share last year, a including special dividend. This year as well, it paid a special dividend of $2.0 per share, indicating its balance sheet strength and earnings growth visibility.
Even if natural gas prices are low currently, they might bounce back later this year. Higher demand will likely drive the prices higher, benefitting gas producers like TOU.
Tourmaline’s top-class balance sheet, along with visible financial growth, is expected to create notable shareholder value. It returned 80% last year, notably beating TSX energy stocks. It has dropped a significant 30% since its 52-week high in October 2022. So, based on its valuation, it is currently trading at a free cash flow yield of 10%. That’s a tad lower than the industry average. However, TOU still looks attractive with its strong execution and higher potential allocation of its free cash to shareholder returns.
Bank of Montreal
Canadian bank stocks have dropped 10-15% in the last 12 months due to macroeconomic uncertainties. Canada’s third-biggest Bank of Montreal (TSX: BMO) has been no exception and has lost 13% in the same period. This weakness could be an opportune time for value seekers.
Bank of Montreal reported its fiscal Q1 2023 earnings this week. While a net income came above expectations, the results imply a gloomy outlook for the future. Like peers, BMO also set aside higher provisions in the recently reported quarter. However, BMO looks relatively well placed compared to peers. Some Canadian banks have notably upped their provisions in Q1, while the Bank of Montreal has kept them stable compared to last year.
Bank of Montreal posted an adjusted net income of $2.27 billion in Q1 2023, marking a 12% decline year over year. It is currently trading at a dividend yield of 4.4%, which is in line with its peers. Notably, it has consistently paid shareholder payouts for the last 194 years.
BMO stock is currently trading at a price-to-book value of 1.3, which is lower than its historical average. Sticky inflation and rate hikes might continue to weigh on banking stocks. However, fundamentally strong stocks will likely recover later in 2023, and, thus, BMO could be an appealing bet.
