The recent market volatility has pushed some of the quality TSX stocks below their fair values. If you are looking for some undervalued names, here are three top bets from the different sectors.
MEG Energy
MEG Energy (TSX: MEG) stands tall in the TSX energy space with its long reserve life. The stock has lost 17% since April 2023 but has been a significant value creator since the pandemic.
Despite the rally, the stock is currently trading at 10 times its earnings and 6 times its free cash flows. That’s relatively cheap compared to peer TSX energy stocks, which are trading 7 times free cash flows.
MEG aims to produce 105,000 barrels of oil equivalent per day in 2023, nearly 10% higher than in 2022. It produces thermal oil with its highly efficient SAGD (steam assisted gravity drainage) operations.
Apart from the operational growth, the company has seen significant financial improvement in the last few years. It has repaid a large chunk of its debt since Q1 2021, which has notably strengthened its balance sheet.
MEG currently distributes 50% of its free cash flows to shareholders via buybacks. It does not pay dividends but the buybacks could provide a floor to the stock. MEG looks fundamentally strong, given its solid balance sheet position and earnings growth visibility. The undervalued stock could rally higher and outperform peers should oil move higher.
B2Gold
Gold has gained 14% in the last six months, notably beating broad market indexes. It will likely keep trading higher this year, because of the supporting macroeconomic environment. A potential pause on rate hikes should stabilize the dollar, which will likely make the bullion appealing. Moreover, recession expectations should push market participants toward the traditional safe haven.
Higher prices should benefit gold producers. Canadian producer B2Gold (TSX: BTO) is one compelling name from the TSX gold miners’ space. It has returned 9% in the last 12 months and 60% in the last five years.
Thanks to higher inflation, B2Gold’s all-in sustainable costs have increased from $888 per ounce in 2021 to over $1,200 this year. As the realized gold prices remained lower till late last year, gold producers saw pressure on margins. However, the recent gold price surge should come as a respite for them.
BTO is a relatively undervalued name compared to peers, trading at 19 times earnings. Its solid liquidity position and negligible debt speak about its fundamental strength and make it stand tall among its peers.
Bank of Montreal
Canadian banks are some of the best and stable financial institutions to watch amid an impending economic downturn. Among the big six, Bank of Montreal (TSX: BMO) is one of my favourites and will likely outperform its peers.
It is currently trading at a price-to-book value ratio of 1.2 times against the industry average of 1.3 times. Like peers, BMO stock has also been on a downtrend due to the regional banking fiasco in the US and an expected recession.
However, BMO seems well-placed to tackle the downturn due to its stable earnings and superior credit profile. It has one of the best CET1 (Common equity tier 1) ratios of 18.2%, way higher than peers. Moreover, BMO has the longest-running dividend payment streak of 194 years for any Canadian company. The Big Six Bank stock yields a decent 4.8%, in line with its peers.
