What makes a stock cheap? That’s likely the first question that pops into your head when coming to this article. And frankly, it comes into mine as well. There are many ways to conduct your research in this regard, but there are a few points investors can look for.
Today, let’s look at some of those points, as well as three TSX stocks that look remarkably cheap right now.
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What’s cheap anyway?
In the world of investing, “cheap” doesn’t necessarily mean a stock with a low price tag. Instead, it refers to a stock that may be trading for less than its intrinsic value. So, one way to assess a stock’s cheapness is by looking at its valuation ratios. A common ratio is the price-to-earnings (P/E) ratio. It compares a company’s stock price to its earnings per share. A lower P/E ratio suggests the stock might be cheaper as you’re paying less per dollar of the company’s profit.
Then there is the discount potential. If a stock’s price doesn’t reflect the company’s strong growth prospects, it could be undervalued. Investors might see this as an opportunity to buy before the price catches up to the company’s potential.
Finally, consider the market potential. Sometimes, negative market sentiment can lead to a stock price being lower than its fundamentals suggest. This could be due to temporary industry downturns or overall market corrections. With that in mind, let’s look at three that fit the bill.
Three stocks to consider
I’m going to work backwards here to find three TSX stocks that could be quite cheap on the TSX today. First, let’s consider the market’s sentiment. During a downturn, Canadian investors have turned away from tech stocks after seeing huge growth and returns a few years back. But in a stronger market, those returns are likely to come back once again.
Therefore, considering Canadian tech stocks that look undervalued right now should certainly be a good place to look. And if there are three that I like right now, they have to be Lightspeed Commerce, Shopify, and OpenText.
All three of these tech stocks have fallen back because of market sentiment. But with consumer confidence growing, many are likely to see their shares climb once more. Lightspeed stock is due for more growth as partnerships expand its operations. Shopify stock has balanced its books, expanding and seeing transaction volume grow. Meanwhile, OpenText stock is using artificial intelligence to make the company work even better than before.
Bottom line
Another item all three have in common is low valuations. Lightspeed stock trades at 44.1 times earnings, which is a fraction of its historical P/E ratio that is usually in the triple-digit range. Shopify stock is also down to 59.3 times earnings, again far lower than the 300 P/E score we usually see. Finally, OpenText stock trades at just 7.9 times earnings, about half of its normal range. Therefore, all three of these TSX stocks look incredibly cheap on the TSX today and are due for a huge recovery quite soon.
