2 Undervalued TSX Stocks With a Legit Shot at Beating the TSX

Beat the broader markets with these TSX stocks.

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If you are betting on individual stocks, you should at least aim for higher returns than the broader markets. Otherwise, you would have been better off with low-risk index funds. So, here are some of the discounted TSX stocks that could beat the TSX Index.

Whitecap Resources

Oil prices have been trending lower in the last few months despite solid fundamentals. However, investors should note that even at current prices, energy production companies are reporting a decent amount of free cash flows. Whitecap Resources (TSX:WCP) is one such example. It recently put up a handsome show with its first-quarter earnings numbers.

Whitecap’s production rose 10% in Q1 2023 due to its recently completed acquisitions. The clean energy producer posted free cash flows of $215 million in the same quarter, marking nice 20% growth year over year. The company could see superior production growth, especially in the prolific Montney play, driven by its inorganic growth.  

Energy companies have seen such earnings growth before. But what stands out this time is their stellar balance sheets. They are in some of their best financial positions ever, thanks to their capital discipline and aggressive debt reductions. In the case of Whitecap, its leverage ratio currently stands at 0.6 times, among the lowest historically.

WCP stock currently yields a decent 6%, higher than Canadian energy bigwigs. Interestingly, its dividend is funded even when the crude oil price falls to US$50 a barrel.

The stock has returned 7% in the last 12 months. WCP is trading at 7 times free cash flows and looks undervalued compared to TSX mid-cap peers. It makes sense to bet on energy stocks like WCP with their improving balance sheets, earnings growth visibility, and stable dividends.

North West Company

North West Company (TSX:NWC) sells groceries to rural communities in Northern Canada and beyond. While that seems like a boring business, it has generated stable wealth for shareholders over the years. Its revenues have grown by 5%, while its net income has increased by 10% compounded annually in the last decade. Such stable growth with admirable margin stability speaks for its fundamental business strength.

NWC stock has returned 16% in the last 12 months and 70% in the last five years. The rural retailer is currently trading at 15 times its earnings and looks undervalued. It offers a stable yield of 4%, higher than broader markets. Considering the decent earnings growth potential and dividends, NWC looks a like an appealing investment proposition.

North West Company’s long-term average return on capital ratio comes out to a stellar 17%. The return on equity ratio is at around 25%, indicating robust profitability. Apart from profitability, the retailer with over 3.5 centuries of experience selling to Canadians has a solid balance sheet position with low debt and high liquidity.

NWC will likely play well and outperform as the market downturn seems in sight. Its stable earnings, dividends, and less volatile stock should stand tall in volatile markets.   

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends North West and Whitecap Resources. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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