The stock market crash in the last year has once again brought the focus back to value investing. Investors are now looking to buy shares of companies that are trading at a fair multiple and generating sustainable profits.
A liberal monetary policy allowed growth stocks to generate outsized gains in the last decade. But as interest rates were hiked and inflation raised its ugly head, companies were forced to cut costs and focus on profitability. This belt tightening drove valuations of growth stocks off a cliff.
But there’s an upside to ongoing volatility. You can now go bargain hunting and create a portfolio of undervalued companies, as several TSX stocks are currently trading at a discount to their intrinsic value.
Here are three such undervalued TSX gems you need to watch out for.
Shawcor stock
A small-cap material sciences company, Shawcor (TSX:SCL) serves enterprises in the energy, infrastructure, and transportation markets. It ended 2022 with an order backlog of $1.2 billion, an increase of 22% from Q3 of 2022. The increase was driven by offshore pipe coating projects, which account for a majority of Shawcor’s sales.
Shawcor expects adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) to gain pace in the second half of 2023. Analysts also expect its adjusted earnings to improve to $1.76 per share in 2023, compared to a loss of $0.43 per share in 2022.
Priced at 6.9 times forward earnings and 0.5 times sales, Shawcor stock is trading at a discount of 20% to consensus price target estimates.
Ag Growth International stock
A company that operates in the agriculture sector, Ag Growth International (TSX: AFN) is part of a recession-resistant industry. Valued at a market cap of $1.1 billion, Ag is among the largest equipment manufacturers in the global agriculture industry.
In 2022, Ag Growth International increased sales by 22% year over year to $1.5 billion, while adjusted EBITDA was up 33% at $235 million. Despite elevated inflation levels, EBITDA margins increased to 16.1% from 14.7%, indicating the company enjoys pricing power.
Ag Growth is on track to increase sales to $1.7 billion by 2024. Its adjusted earnings are forecast to expand to $5.57 per share in 2024 from $3.74 per share in 2022.
So AFN stock is priced at 0.7 times forward sales and 11 times forward earnings, which is very cheap. The TSX stock is priced at a discount of 15% to price target estimates.
Neighbourly Pharmacy stock
The final undervalued TSX stock on my list is Neighbourly Pharmacy (TSX: NBLY), an operator of retail pharmacy chains in Canada. A growth stock flying under the radar, Neighbourly Pharmacy has increased sales from $150 million in fiscal 2019 (ended in March) to $671 million in the last four quarters.
Neighbourly’s same-store sales were up 4% year over year in Q3, while revenue and EBITDA almost doubled to $265.3 million and $28.5 million, respectively. It ended the last quarter with a network of 284 pharmacy locations.
Analysts expect sales to touch $954 million in fiscal 2024, while adjusted earnings might expand to $0.76 per share, compared to a loss of $2.57 per share in fiscal 2022.
So, NBLY stock is priced at one-time forward sales and 30 times forward earnings, which is very reasonable for a growth stock. The stock is also trading at a discount of 40% to price target estimates.
