Volatile markets often bring a lot of worthy opportunities for discerned investors. Some high-quality TSX stocks have dropped below their fair values recently. Here are three of them.
Vermilion Energy
Vermilion Energy (TSX:VET) is one of the most discounted stocks in the Canadian energy space. There has been no respite for Vermilion shareholders, as the stock continues to trade weak. It has lost 50% of its market value since August 2022. However, it is an attractive bet at current levels.
VET stock is currently trading at four times its free cash flows. That’s way lower compared to the industry average of around six times. Vermilion has seen massive free cash flow growth and balance sheet improvement in the last few quarters. This stock deserves to trade at the sector average.
VET stock has been weak mainly due to the burden of windfall taxes and a steep plunge in natural gas prices. However, the company could see superior free cash flow growth even after considering the impact of windfall taxes. Moreover, gas prices seem to have hit the floor. They could soon bounce back amid higher seasonal demand.
So, Vermilion Energy stock could revert soon, given its fundamental strength and a potential reversal in natural gas. It looks cheap compared to peers and offers handsome growth prospects.
goeasy
Canada’s top consumer lender stock goeasy (TSX:GSY) saw a vertical drawdown, losing more than 30% in the last two months. The fall came as the federal government announced its plans to lower the maximum annual interest rate on loans from 47% to 35%.
However, the management has clarified that it will not have a material negative impact on its earnings of lowering rates. That’s because the loans that have a higher rate than the proposed one form only one-third of its total loan book.
The company has seen superior growth in the last decade, despite being in a risky, unstable industry. Its net income grew by a steep 33% compounded annually in the last decade. It has consistently reported a return on equity above 20%, indicating strong profitability.
GSY stock is currently trading 11 times its earnings and looks discounted. Its historical average comes well above the current metric. So, as the company keeps growing at an above-average pace, we could see higher value creation from GSY stock.
Air Canada
Despite the gloomy global growth outlook, I’m optimistic about Air Canada (TSX:AC) stock, mainly because of its recent guidance. AC stock has lost 13% in the last 12 months, underperforming broader markets.
It is currently trading five times its forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation, which is lower than the industry average.
The flag carrier has been seeing encouraging demand for the last few quarters. Air Canada saw a late recovery in revenues, as Canadian travel restrictions waned relatively late compared to peer countries. For 2023, Air Canada management expects an adjusted EBITDA of around $2.75 billion. That’s a strong growth after years of cash burn and losses.
While inflation and lower discretionary spending are some of the key challenges for Air Canada, it will likely overcome those with its strong operating efficiency. Even though AC stock might trade weakly in the short term, it offers handsome growth prospects for long-term investors.
