The TSX has sustained its rally since November 9, 2023, gaining 2.7%, and is back above 20,000 mid-month. Two sectors, energy and communications services, advanced more than 2.3%, although two prominent constituents (one from each sector) suffered price declines in the last 10 days, becoming undervalued.
Whitecap Resources (TSX: WCP) and Cogeco Communications (TSX: CCA) are the top picks for Canadian investors looking to buy oversold TSX stocks.
Return of capital framework
Energy stocks are surging, and profit-taking is inevitable. Whitecap Resources trades at less than $10, and the current share price of $9.66 (-5.7% year-to-date) is a good entry point. You can also partake in the juicy 7.5% dividend. Also, the payout frequency is monthly.
The $5.9 billion oil-weighted growth company operates in Alberta, British Columbia, and Saskatchewan. Whitecap said its low-decline light oil asset base supports an internally funded business model, and is a growth and cash generation engine. This energy stock has rewarded investors with a 270.3% return in three years.
In Q3 2023, revenue (petroleum and natural gas) and net income declined 10.7% and 52.9% respectively to $955.9 million and $152.7 million versus Q3 2022. Funds flow during the quarter increased 12% to $466 million versus Q2 2023 due to strong crude oil production and prices. However, the figure is 14.8% lower than a year ago.
The quarter’s bright spot was the 42.5% year-over-year decline in net debt to $1.3 billion. The energy producer acquired XTO Energy Canada a year ago and has reduced debt by over $900 million. After achieving the debt milestone, the next step is to enhance Whitecap’s return of capital framework.
Management plans to return 75% of free funds flow to shareholders through a sustainable base dividend and share repurchases. The total dividend payment of $87.8 million is approximately 50% of free funds flow and 30.7% higher compared to Q3 2022.
Whitecap’s primary objective is long-term sustainability and profitability to drive increasing shareholder returns. The Board-approved capital budget of $1 billion to 1.2 billion capital budget for 2024 reflects the objective. The company expects the combined asset base (East and West Divisions) to hit its organic production growth target of 200,000 boe/d by year-end 2027.
Record customer growth
Cogeco Communications trades at a deep discount at $51.55 per share (-29.31% year to date), although the dividend yield is a hefty 6.71%. Still, the stock should recover following the impressive customer growth, completed network expansion, and higher free cash flow (FCF) in Q4 fiscal 2023.
In the three months that ended August 31, 2023, revenue increased 2.6% to $766.6 million, while profit declined 18.7% to $90.5 million versus Q4 fiscal 2022. However, FCF jumped 148.5% year over year to $86.2 million. Management said the 14,041 Internet service customer net additions is a new quarterly 15-year record for Cogeco Connexion.
With the completed and ongoing network expansion, Cogeco President and CEO Philippe Jetté expects to continue adding new Internet customers. The growth should contribute to adjusted EBITDA and FCF in fiscal 2024 and beyond.
Time to buy on weakness
The pullback or weakness of Whitecap Resources and Cogeco Communications is temporary. Both stocks should rebound soon due to solid fundamentals.
