While the equity markets staged a rebound in 2023, the rally was primarily driven by the tech sector as investors were extremely bullish on the AI (artificial intelligence) megatrend. There are several other stocks across multiple sectors trading at a discount to all-time highs due to headwinds such as interest rate hikes, inflation, lower consumer spending, and a sluggish macro economy.
However, most federal banks forecast lower interest rates in 2024, which should drive company valuations higher as investor sentiment improves. Here are three cheap or undervalued stocks I’d buy in bulk before the next bull market arrives.
EQB stock
A mid-cap banking company, EQB Bank (TSX:EQB) is valued at $3.5 billion. Despite a tepid lending environment in the last two years, EQB stock has risen by more than 55% since January 2023.
In fiscal Q4 of 2023 (ended in October), EQB grew its loans under management and profit margins while generating higher non-interest revenue. Its solid performance in the October quarter allowed EQB to raise its quarterly dividends, resulting in a forward yield of 1.8%.
EQB stock has delivered market-beating gains to shareholders in the past decade, rising 256% since January 2014. Despite these outsized gains, EBQ stock trades at less than eight times forward earnings, which is very cheap. Bay Street forecasts the company to expand adjusted earnings by 19.5% annually in the next five years.
Aritzia stock
Down 41% from all-time highs, Aritzia (TSX:ATZ) is valued at $3.8 billion by market cap. A high-end retail brand, Aritzia has been wrestling with slowing consumer demand in recent months. Its sales in fiscal Q3 2024 (ended in November) rose by just 5% year over year, compared to growth rates of 38% and 63%, respectively, in the prior two years.
As the consumer environment remains mixed, Aritzia has focused on improving its profit margins. While its adjusted earnings are forecast to narrow from $1.86 per share in fiscal 2023 to $0.9 per share in fiscal 2024, they are estimated to expand to $1.79 per share in fiscal 2025.
Priced at 19.4 times forward earnings, ATZ stock is not too expensive and may outpace the broader markets if it can widen earnings and cash flows going forward.
IA Financial stock
The final TSX stock on my list is IA Financial (TSX:IAG), which offers insurance and investment solutions. In Q3 2023, IAG reported adjusted earnings per share of $2.50, an increase of 10% year over year. Its core return on common equity in the last 12 months stood at 14.8%. IAG ended Q3 with a solvency ratio of 14%, above its operating target of 120%.
IAG emphasized growth momentum in Q3 was driven by its ability to generate new business resulting in a 17% increase in premiums and deposits.
In the last 10 years, IAG stock has returned close to 160% to shareholders after accounting for dividends. It currently pays investors an annual dividend of $3.06 per share, translating to a yield of 3.5%.
Moreover, the TSX stock is priced at 9.3 times forward earnings, which is attractive given earnings are forecast to rise by 6.6% in 2023 and 10.6% in 2024. Analysts remain bullish and expect IAG stock to gain around 15% in the next 12 months.
