Historically, value stocks have outpaced most asset classes. Even during the bear market of 2022, investors were bullish on value stocks to hedge against a volatile macro economy and elevated inflation levels.
Typically, undervalued stocks trade below their intrinsic value and deliver outsized gains in a bull run. Here are the two best value stocks Canadian investors can buy right now.
Linamar stock
One of the largest automotive suppliers globally, Linamar (TSX:LNR) has operations in North America, Asia, and Europe. Despite a challenging global environment, Linamar increased sales by 28.9% year over year to $2.3 billion in 2023. Comparatively, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew 41% to $297 million, indicating a margin of 13%.
Bay Street expects sales to increase 15.2% to $9.1 billion, with adjusted earnings per share forecast to grow by 37% to $8.59 per share in 2023. So priced at 0.5 times forward sales and 9 times forward earnings, Linamar stock is very cheap.
In addition to its low valuation, Linamar also pays shareholders an annual dividend of $0.88 per share, translating to a forward yield of 1.2%. These payouts have risen by 13.3% annually in the last 10 years.
Linamar emphasized its capital expenditures will account for between 6% and 8% of sales in 2023, allowing the company to increase its top line by double-digit percentages and support additional dividend raises.
Linamar ended Q1 with $1.3 billion in liquidity and net debt of $475.5 million. Its net debt-to-EBITDA multiple is also sustainable at 0.43 times, providing it with the flexibility to navigate supply chain disruptions and a spike in commodity prices.
Analysts remain bullish on Linamar stock and expect shares to surge around 18% in the next 12 months.
Exco Technologies stock
Another manufacturing company, Exco Technologies (TSX:XTC) produces tooling for light metal industries. Its strong growth profile is driven by the rapid adoption of electric vehicles allowing Exco to increase sales from $412 million in fiscal 2020 to $490 million in fiscal 2022 (ended in September).
Analysts expect sales to touch $602 million in fiscal 2023 and grow by 7.7% to $650 million in 2024. So, priced at 14.3 times forward sales, Exco stock is undervalued, given its adjusted earnings are forecast to rise by 26.5% in 2023 and 38.7% in 2024.
It also pays shareholders a quarterly dividend of $0.105 per share, indicating a yield of over 5%. These payouts have more than tripled in the last 10 years, and the company increased dividends 14 times in the last 13 years.
Exco has a global footprint with 20 plants in nine countries and expects to end fiscal 2026 with sales of $750 million. It emphasized that consumer demand for automotive vehicles is outstripping supply in most markets, which are wrestling with a shortage of semiconductor chips and other raw materials.
While dealer inventory levels have risen in recent months, they are near record lows, as vehicle transaction prices hover at all-time highs. These factors should act as tailwinds for Exco as future vehicle production levels normalize.
Moreover, original equipment manufacturers are looking to sell higher-margin accessory products to enhance profit margins, and Exco’s automotive solutions business derives a significant portion of sales from such products.
Exco stock is priced at a discount of 20% to consensus price target estimates.
