When looking for the right undervalued stocks to buy, the level of undervaluation shouldn’t be the only metric you consider. You have to analyze the stock’s fundamental strengths and market dynamics to ensure that this undervaluation does not represent a deeper problem.
At any given time, several compelling value stocks trading on the TSX may prove to be profitable long-term holdings if bought at the right time and value. This month, three stocks may fit this bill.
An insurance company
Manulife Financial (TSX: MFC) is one of the Canada-based insurance giants with a diverse business model and an impressive international reach. The company operates in multiple regions around the globe and has over 34 million customers around the globe using one of its many financial services/products.
Insurance is the company’s core business and still makes a significant segment of its yearly revenues; the operational model is diversified and includes investment, wealth management, and even banking services in a limited capacity.
As an investment, dividends are the most cherished aspect of Manulife Financial. The company has been growing its payouts for nine consecutive years, and the dividends are currently available at a juicy 5.6% yield. The discounted valuation, represented by a price-to-earnings of 8.9, makes the investment even more appealing.
An energy company
Undervaluation is currently a commonplace phenomenon among energy stocks in Canada right now, and Imperial Oil (TSX: IMO) is a good example of this phenomenon. This large-cap energy giant is trading at a 100% premium to its pre-pandemic 2020 peak, yet the price-to-earnings ratio is at an attractive level of 7.5.
The strong bullish momentum that carried the stock to this height has been waning for some time, but it hasn’t yet reversed.
The energy stocks might remain at the current levels as it becomes the new “normal,” or a correction may upset the current position and push the stock down further, increasing the size of the discount, the stock’s dividend yield, and lowering the valuation to a more attractive level (unless the financial update catches up). Still, in its current form, Imperial Oil stands as an attractive value pick.
A fertilizer company
Nutrien (TSX: NTR) is one of the largest fertilizer companies in the world and the foremost producer of potash in the world, which is a core fertilizer ingredient. It’s also the third-largest global producer of Nitrogen, catering mostly to the North American agricultural industry.
Nutrien has the infrastructure, supply chain resources, and global presence complementing its dominance in the global fertilizer market.
It’s also a financially healthy company currently undervalued and trading at a price-to-earnings ratio of just 5.1. However, the valuation discount is also connected to a massive price discount of 38% from its 2022 peak. Thanks to this discount, the dividend yield has also gone up to 3.2%, providing value investors with another incentive to buy this stock.
- We just revealed five stocks as “best buys” this month … join Stock Advisor Canada to find out if Nutrien made the list!
Foolish takeaway
The three value picks represent leaders and giants in their respective fields. They are stable companies with a strong international presence, and they offer decent return potential, mostly in the form of dividends. Buying them in their current undervalued state may also improve their long-term capital-appreciation potential.
