A Few Years From Now, You'll Wish You Bought This Undervalued Stock

A Few Years From Now, You’ll Wish You Had Bought This Undervalued Stock

Undervalued and modestly discounted stocks are cherished, but when the discount becomes too steep, and there are no substantial signs of recovery, investors become wary.

Adam Othman

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published October 8, 2024 9:15 pm EDT

A stock can be undervalued and discounted for a number of reasons and may remain that way for those or even a different set of reasons. Understanding both – i.e., the factors that triggered a stock’s undervalued state and the ones keeping a slumped stock down – is critical in making an informed buying decision.

However, even when you understand these factors, if a stock remains low for a relatively long period, it’s natural to be wary of it. However, in doing so, you may lose a significant opportunity that you may regret in the coming years. One stock that you might consider buying now instead of wishing that you should have bought it in the future is Parex Resources (TSX: PXT).

Oil industry worker works in oilfield — Source: Getty Images

The company

Parex Resources is different from most Canadian energy stocks because, unlike the ones that operate locally or have a mixed portfolio of assets and operations, Parex operates almost exclusively in Colombia and is one of the largest independent energy companies in the country.

It has a massive land position (about 5.4 million net acres) and, on average, produces about 53,568 boe/d, which covers a significant segment of the country’s average consumption.

The company recently lowered its guidance to meet the consumption realities and trends in the country, and it was one of the factors that pushed the stock down a cliff.

However, the fundamental strengths remain the same while the outlook, apart from the production numbers, looks quite promising. The long-term capital reallocation plan of the company is reinvesting about two-thirds back in the business and distributing the rest to the investors. Thankfully, this strategy hasn’t yet resulted in a dividend cut.

The stock and valuation

The stock took a nosedive at the end of last year, and since then, it has fallen by about 52% (in less than a year). However, the stock is just turning the corner and has already risen by about 11% in the last 10 days.

The most significant impact of the slump was seen on the dividends. The yield surged up to 11.7%, primarily because of the slump but also because the company recently grew its dividends again, rather conservatively this time around. This may indicate a healthy long-term dividend growth approach.

Another positive consequence of the slump is its valuation. The p/e ratio is at merely 3.1, the price-to-book ratio is 0.5, and the EV/sales is also low at 0.8. The stock is both undervalued and heavily discounted and it’s turning bullish, so right now might be the perfect time to buy it and lock in this enticing yield.

Foolish takeaway

This energy stock can also help you leverage geographic diversity within the sector. As an energy company operating in an entirely different country, it may have its own challenges, but it may also be sheltered against the headwinds that rock local energy companies. Parex may keep delivering great returns, even if the companies back home are losing investors money.