The equity markets have pulled back in September, driving down valuations of companies across sectors. But it also provides investors an opportunity to buy quality stocks at a steep discount and benefit from outsized gains over time.
Here are three such undervalued growth stocks you can consider buying in October 2023.
Is Dollarama stock a good buy right now?
One of the largest companies in Canada, Dollarama (TSX: DOL) is a discount retailer. Despite a sluggish macro environment, Dollarama has increased sales from $4.3 billion in fiscal 2022 to $5 billion in fiscal 2024 (ended in January).
Typically, discount retailers are viewed as defensive players, as these companies are positioned to generate cash flows across business cycles. For instance, Dollarama’s free cash flows more than doubled in the past five years to $712 million, indicating a yield of 14%.
Its expanding cash flows allow Dollarama to pay shareholders an annual dividend of $0.284 per share, which translates to a forward yield of just 0.30%. However, these payouts have risen at an annual rate of 11.2% in the last eight years.
DOL stock has surged close to 600% since September 2013, easily outpacing the broader indices. Despite these stellar returns, DOL stock trades at 27.6 times forward earnings, which is not too expensive given its earnings are forecast to rise by 17.5% annually in the next five years.
Analysts remain bullish and expect Dollarama stock to gain 10% in the next 12 months.
Is goeasy stock undervalued?
goeasy (TSX: GSY) is part of the financial lending space. Due to interest rate hikes since early 2022, the cost of debt has increased considerably, resulting in a tepid lending environment. Financial lending stocks are cyclical, but goeasy is on track to increase adjusted earnings per share by 17.7% in 2023.
Founded in 1990, goeasy initially began as a loan provider for home appliances and furniture. It has since expanded its portfolio of loan products, allowing the company to diversify its revenue base.
GSY stock has surged 861% in the last decade after adjusting for dividends. Down 48% from all-time highs, goeasy still trades at a cheap price to 2023 earnings multiple of 7.8 times. It currently offers shareholders an annual dividend of $3.84 per share, indicating a yield of 3.6%. These payouts have risen by 17.8% annually in the last 16 years.
Due to its compelling valuation, GSY stock trades at a discount of 66% to consensus price target estimates.
What is the target price for Nuvei stock?
The final stock on the list is Nuvei (TSX: NVEI), which currently trades 88% below all-time highs. Currently valued at $2.82 billion by market cap, NVEI trades at a price to 2023 sales multiple of 1.3 times, which is quite cheap for a growth stock.
Nuvei is a financial technology company that offers a robust payment platform for small and medium enterprises. It is forecast to increase sales from $1.13 billion in 2022 to $1.93 billion in 2024.
Moreover, Nuvei has almost tripled its free cash flow from $91 million in 2020 to $254 million in 2022. It recently announced a quarterly dividend of $0.135 per share, indicating a yield of 2.54%.
Priced at nine times forward earnings, NVEI stock trades at a discount of 100% to consensus price target estimates.
