When it comes to finding cheap stocks, it can be difficult when just considering dips in the market. That’s why the price-to-earnings (P/E) ratio is a popular tool among investors for identifying undervalued stocks. Essentially, the P/E ratio measures a company’s current share price relative to its earnings per share (EPS). A low P/E ratio can indicate that a stock is undervalued compared to its earnings, making it potentially a “cheap” buy.
Historically, stocks with low P/E ratios have often outperformed those with higher ratios. For instance, during the 2008 financial crisis, many stocks saw their P/E ratios drop significantly, yet those who invested in these undervalued stocks often saw substantial gains in the following recovery years.
What’s more, a low P/E ratio can also signal future growth potential. If a company is investing heavily in its operations, it might temporarily reduce earnings, thus lowering the P/E ratio. However, these investments can lead to higher future earnings, making the stock a bargain at its current price. For example, during periods of economic downturns, companies with strong fundamentals but low P/E ratios can offer significant upside as the economy recovers.
So today, let’s look at three cheap energy stocks that fit the mold!
Innergex Renewable
Innergex Renewable Energy (TSX:INE) is a powerhouse in the renewable energy sector, making waves with its diverse portfolio of hydro, wind, and solar assets. Historically, Innergex has shown impressive growth. From its humble beginnings as a hydroelectric company in 1990, it has expanded significantly, boasting a total installed capacity of 4.2 GW, enough to power over a million homes.
Despite some financial hurdles, including a precarious debt structure, Innergex stock continues to grow its revenue, having quadrupled it between 2013 and 2022. Recent earnings have shown stability, with the company’s revenue growth and contracted output providing a solid foundation against market fluctuations.
Innergex’s forward dividend yield is a strong 3.5%, making it an attractive option for income-focused investors. Additionally, about 88% of its output is contracted, ensuring a steady revenue stream immune to market price variations. This combination of historical growth, solid earnings, and a high dividend yield makes Innergex a compelling choice for investors today. Especially with a forward P/E at 8.1.
Algonquin Power
Algonquin Power & Utilities (TSX:AQN) is not just your typical renewable energy company. It’s a versatile utility giant offering electric, natural gas, and water services to over 1.2 million consumers in North America. Historically, Algonquin has demonstrated robust growth, with its net generation capacity standing at approximately 1.4 GW and a gross installed capacity of about 2.5 GW. This growth has positioned Algonquin to accommodate future increases in electric utility demand without needing significant new investments in power generation assets.
The recent past has been a rollercoaster for Algonquin, as it saw a significant drop in its market value in 2021 and 2022. However, this slump has made its current valuation very attractive. Despite cutting dividends by 40% to manage debt more efficiently, Algonquin still offers an appealing forward dividend yield of 7.3%.
The company’s strategic decisions, including asset divestitures and dividend cuts, showcase a committed management team ready to steer through financial challenges. With over 63% institutional ownership, including significant stakes by major Canadian banks, Algonquin remains a solid pick for investors looking for both value and income. It currently holds a forward P/E ratio at 12.8.
TransAlta
TransAlta (TSX:TA) is a key player in Canada’s renewable energy market, focusing on wind and hydroelectric power generation. Historically, TransAlta has maintained steady growth, with its diversified asset base providing resilience against market volatility. The company has a significant wind power portfolio, which is complemented by its hydroelectric assets, ensuring a balanced approach to renewable energy generation.
Recent earnings for TransAlta have been strong, supported by long-term contracts that stabilize revenue streams. The company’s forward dividend yield is at a stable 2.5%, making it a favourite among dividend investors.
TransAlta’s commitment to expanding its renewable capacity while maintaining financial prudence has paid off, with its earnings reflecting a well-managed balance between growth and stability. The combination of a robust asset base, strong earnings, and a high dividend yield makes TransAlta an attractive option for investors seeking stable returns in the renewable energy sector. And it now boasts a P/E ratio at just 4.9!
Bottom line
Altogether, Innergex Renewable Energy, Algonquin Power & Utilities, and TransAlta offer compelling investment opportunities on the TSX. Each company has demonstrated significant historical growth, resilient earnings, and attractive dividend yields, making them top picks for investors interested in the renewable energy space.
