Valuations will play a more vital role in driving investor returns this year. As the market readies for more uncertainties, the capital will move from growth stocks to value names. Here are three TSX stocks that are currently trading below their fair values but offer higher growth prospects.
Baytex Energy
Baytex Energy (TSX:BTE) stock is currently trading 3 times its earnings and notably undervalued. In comparison, TSX energy stocks are trading 7 times earnings. BTE has lost 28% in the last 12 months but has returned 900% in the last three years.
These depressed valuations for both the sector and BTE look unjustified to some extent because of their fundamental improvements. For example, like peers, Baytex Energy is sitting at some of its best financial positions ever. Declining debt and decent free cash flow growth prospects make BTE a compelling bet.
Moreover, Baytex’s asset base is expected to become mightier with its recent Ranger Oil acquisition. With this expansion in the US Eagle Ford Basin, Baytex will double production in the next few years.
Not all the growth factors seem baked into BTE stock. So, if oil prices soar higher from here, Baytex will likely outperform.
Air Canada
Canada’s biggest passenger airline stock Air Canada (TSX:AC) has soared a soothing 15% in the last two weeks. Such a jump has been quite rare for AC stock in the last few years after its back-to-back challenges.
AC stock showed some optimism after the management upped its guidance for 2023. Air Canada expects its operating profit to come to around $3.8 billion this year, a significant jump from its previous guidance of $2.7 billion. Despite a gloomy global growth outlook and higher inflation, the flag carrier expects higher profits. That’s mainly due to higher demand and lower-than-expected jet fuel prices. That’s a terrific development for Air Canada and its investors.
In the Q4 2022 earnings call, the management in fact provided a bleak outlook on the cost front due to inflation. However, the updated guidance indicates a faster-than-expected return to profitability even in a challenging environment.
Based on the guidance, AC stock is currently trading at an EV-to-EBITDA (enterprise value-to-earnings before interest, tax, depreciation, and amortization) valuation of 4 times. That’s much lower than peers’ average of around 6 times. Air Canada will likely emerge stronger this year fueled by its long-awaited profitability and improving balance sheet position.
goeasy
Canada’s top consumer lender goeasy (TSX:GSY) has surged a nice 25% in the last two weeks. This came as a relief rally as the company maintained its guidance even after considering the impact of proposed lower annual interest rates.
The lender primarily caters to non-prime borrowers and charges sky-high interest rates. Now the Canadian government is considering lowering the maximum annual interest rates from 47% to 35%. Investors saw it as potential damage to goeasy’s growth and dumped the stock in March 2023.
However, its record Q1 2023 earnings and updated guidance quelled the markets. For 2025, the management expects the total yield on consumer loans at 33%, down from 34%. It expects operating margins to remain intact at over 38% and return on equity to exceed 22%.
GSY has seen terrific growth in the last decade, despite being in such a risky industry. The alternative lender is currently trading 11 times its earnings and looks undervalued. If the company’s guidance materializes, as it has comfortably done in the past, the non-prime lender will likely create meaningful shareholder value.
