Investors such as Warren Buffett and Benjamin Graham have popularized investing in undervalued stocks. As not every cheap stock is a good buy, it’s essential to identify a portfolio of companies that trade below their intrinsic value and are positioned to deliver outsized returns when investor sentiment improves. Here are two such cheap TSX stocks you can buy right now.
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Ensign Energy Services stock
Valued at $448 million by market cap, Ensign Energy Services (TSX: ESI) provides oilfield services to the crude oil and natural gas industries in Canada and the U.S.
Down 90% from all-time highs, Ensign Energy Services might be on the cusp of a turnaround despite a challenging macro environment. In the second quarter (Q2) of 2024, Ensign Energy Services reported revenue of $392 million, compared to $433 million in the year-ago period. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) fell by 14% year over year to $100.2 million, while funds flow from operations fell 16% to $98.3 million.
However, the company is strengthening its balance sheet and repaid $78.9 million of debt in Q2. Since the start of 2023, it has repaid close to $308 million of debt and expects to reduce its debt balance by $292 million by the end of 2025. Moreover, Ensign reduced its interest expense by 19% to $25.5 million and should benefit from a lower-rate environment in the next 12 months.
Ensign Energy has reported a free cash flow of $269 million in the last four quarters. So, the TSX energy stock trades at a trailing free cash flow multiple of just two times, which is really cheap. Analysts remain bullish and expect the energy infrastructure company to gain over 50% in the next 12 months.
Data Communications Management stock
Another small-cap stock on my watchlist is Data Communications Management (TSX: DCM). Valued at $162 million by market cap, Data Communications provides marketing and workflow solutions that aim to solve branding, communications, logistics, and regulatory challenges in North America. It primarily serves companies in regulated sectors such as finance, insurance, healthcare, lottery, and gaming.
In Q2 of 2024, Data Communications reported revenue of $125.8 million, up 5.7% year over year. Its gross profit rose 7.2% to $34.3 million, while its gross margin improved by 40 basis points to 27.3%.
Data Communications grew its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 22.2% to $16.9 million, increasing its margin from 11.6% to 13.4% in the last 12 months. The company’s net debt stood at $75 million, down almost 50% since it acquired Moore Canada Corp (MCC) 12 months ago.
Data Communications is focused on delivering post-integration priorities, which include consolidating its plant network and integrating legacy MCC systems.
Its improving profit margins have enabled Data Communications to report a free cash flow of $21.2 million in the last five months. So, priced at 7.6 times trailing free cash flow, DCM stock is forecast to surge roughly 90% in the next 12 months, given consensus price target estimates.
The Foolish takeaway
It’s essential to understand that the two companies discussed here are small-cap stocks that are more vulnerable to macroeconomic shocks than their large-cap counterparts. Investors should identify other profitable companies trading at a cheap valuation and diversify their portfolios further.
