A proven strategy for equity investors is to buy and hold stocks that trade at a cheap valuation. Here, you need to identify a portfolio of stocks that trade below their intrinsic value to benefit from outsized gains when market sentiment improves. Here are two such cheap TSX stocks I’d buy in June 2024.
Air Canada stock
Valued at $6.16 billion by market cap, Air Canada (TSX:AC) is the largest airline and provider of scheduled passenger services in the Canadian market. While Air Canada is on track to report record revenue in 2024, the stock sits 67% below all-time highs.
One key reason for its underperformance is the company’s sizeable debt balance, which ballooned amid the COVID-19 pandemic. Moreover, rising interest rates have driven interest payments higher for Air Canada, resulting in narrower profit margins. For instance, its net debt at the end of 2019 stood at $2.37 billion, while it increased to $3.78 billion in the first quarter (Q1) of 2024. However, in the last 12 months, Air Canada has reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of over $4 billion, indicating a net-debt-to-adjusted EBITDA ratio of just 0.9 times.
Despite a challenging macro environment, Air Canada’s operating cash flow stood at $1.59 billion in Q1 of 2024. It deployed $536 towards capital expenditures and ended the March quarter with a free cash flow of $1.05 billion, up from $987 million in the year-ago period. A positive free cash flow allows Air Canada to strengthen its balance sheet. In fact, it used the majority of its cash flow to reduce long-term debt from $13 billion to $11.28 billion in the last three months.
Air Canada has reduced its net debt by more than 50% in the last 15 months, which has driven the bottom line higher. With $10 billion in total liquidity, Air Canada expects to invest close to $15 billion in capital expenditures through 2028, which should drive future earnings and cash flows higher.
Priced at 4.9 times forward earnings, Air Canada is among the cheapest stocks on the TSX and trades at a discount of 56% discount to consensus price targets.
Magna International stock
Another TSX stock that has trailed the broader markets in recent years is Magna International (TSX:MG). Valued at $16.9 billion by market cap, Magna International is a TSX giant that trades 53% below all-time highs. However, the drawdown allows shareholders to enjoy a tasty dividend yield of 4.4% and the opportunity to buy a blue-chip stock at a discount.
Despite a challenging macro environment, Magna increased sales by 3% year over year to US$11 billion, higher than the 2% increase in global light vehicle production. The company remains on track to increase sales by 2.8% to $60.1 billion in 2024, while earnings growth is forecast at 4.7% this year. Priced at 7.5 times forward earnings, Magna stock is really cheap and is forecast to expand earnings by 16.4% annually in the next five years, which suggests earnings would accelerate between 2024 and 2028.
A steady expansion in profit margins should translate to dividend hikes. The auto ancillary company has more than tripled its dividend payouts in the last decade.
