While the equity markets continue to touch all-time highs, it’s still possible for investors to identify quality stocks trading at a discount and benefit from outsized gains when the macro economy improves.
Today, the majority of the stock market gains are fueled by big tech companies as part of the artificial intelligence megatrend. There are several other companies across sectors trading at a discount to their intrinsic value. Here are two such undervalued gems you should add to your watchlist in March 2024.
Air Canada stock
The airline sector is cyclical, capital-intensive, and wrestles with low margins. After outpacing the markets for most part of the decade prior to COVID-19, several airline stocks were decimated due to the dreaded pandemic.
As governments shut borders, air travel came to a screeching halt, leading to significant losses for airline companies, including Air Canada (TSX:AC). After rising over 3,000% between 2010 and 2020, Air Canada stock fell roughly 80% from all-time highs in early 2020.
While lockdown restrictions have eased and the rebound in global travel has gained momentum, Air Canada and its peers continue to wrestle with macro headwinds such as rising interest rates, higher oil prices, inflation, and slower consumer spending. So, why am I bullish on Air Canada stock?
Valued at a market cap of $6.6 billion, Air Canada increased operating revenue by 32% year over year to $21.83 billion in 2023. It ended 2023 with an operating cash flow of $4.32 billion, up from $1.95 billion in 2022. The airline giant spent $1.56 billion on capital expenditures, reporting a free cash flow of $2.75 billion, up from $1.96 billion in the year-ago period.
The company’s cash flow margin of 12.6% allows Air Canada to reduce its debt and strengthen its balance sheet. It reduced net debt by $2.9 billion in the last 12 months, ending the year with a net debt of $4.56 billion.
Priced at 5.1 times forward earnings, Air Canada stock is really cheap and trades at a discount of 55% to consensus price target estimates.
Exchange Income stock
Another TSX value stock is Exchange Income (TSX:EIF), which also offers a tasty dividend yield of 5.3%. In the last 20 years, EIF stock has returned over 2,800% to shareholders after adjusting for dividends. Despite its outsized gains, the TSX stock is priced at 15 times forward earnings. Comparatively, analysts forecast Exchange Income to expand earnings by 11.4% annually in the next five years.
Exchange Income is an acquisition-oriented company with two primary business segments, which include aerospace and aviation & manufacturing. Over the years, Exchange Income has focused on acquiring profitable companies that operate in niche markets and are positioned for organic growth.
Despite an uncertain macro environment, Exchange Income reported record revenue, adjusted earnings before interest, tax, depreciation, and amortization and free cash flow in 2023. Last November, the company announced its 17th dividend increase since 2004 due to its impressive numbers and consistent profit margins.
Analysts remain bullish on EIF stock and expect it to surge 29% in the next 12 months.
