The S&P/TSX Composite Index has jumped about 25% over the past year. Despite the uptrend, several fundamentally strong TSX stocks are still undervalued, providing an opportunity to buy and hold for the long term. Against this background, let’s look at three undervalued stocks that can help build significant wealth over time.
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Undervalued stock #1
Investors seeking undervalued stocks with solid growth prospects could consider subprime lender goeasy (TSX: GSY). Shares of the financial services company have consistently outperformed the broader markets and generated notable gains. For instance, goeasy stock is up about 71% over the past year and has gained 275% in five years. Despite this significant rally, its stock appears attractive on the valuation front, suggesting it still has room to run.
The company has been growing its earnings per share (EPS) at an impressive compound annual growth rate (CAGR) of 28.1% over the past five years. Moreover, this growth momentum is likely to continue in the years ahead. While its EPS is growing at a double-digit rate, its stock trades at a next-12-month (NTM) price-to-earnings (P/E) ratio of just 9.9, implying it is significantly undervalued relative to its growth prospects.
The company’s top line will likely benefit from its large and expanding subprime lending market, omnichannel offerings, and diversified funding sources. Higher revenue, steady credit and payment performance, and operating efficiency will lead to double-digit earnings growth, which will support its share price and higher dividend payouts. Overall, goeasy stock offers long-term investors value, income, and growth.
Undervalued stock #2
Shares of the cloud-based commerce platform provider Lightspeed(TSX: LSPD) are too cheap to ignore near the current levels. Lightspeed stock has underperformed the broader markets in 2024 due to macro uncertainty and prolonged high interest rates. Given the pullback, Lightspeed stock trades at the NTM enterprise value-to-sales (EV/Sales) ratio of just 1.5, which is near the all-time low.
While its stock is undervalued, the company’s fundamentals remain solid. Lightspeed has been steadily growing its organic sales while benefitting from strategic acquisitions. Additionally, the company is well-positioned to capitalize on the shift towards multi-channel selling models and the modernization of point-of-sale (POS) platforms. As more businesses adopt these models, Lightspeed stands to gain significantly.
Lightspeed’s emphasis on growing its high Gross Transaction Volume (GTV) customer base bodes well for future growth. These customers adopt its multiple modules, which results in higher retention and average revenue per user (ARPU). During the first quarter (Q1) of fiscal 2025, Lightspeed’s ARPU increased by 31% year-over-year, driven by its focus on its unified POS and payments offering and high GTV customer adoption.
Lightspeed is working to reduce losses and improve efficiency. Its cost-cutting initiatives, combined with a growing revenue base, suggest that Lightspeed could achieve sustainable earnings in the near future.
With its low valuation, growing revenue base, increased payment penetration, and cost-efficiency initiatives, Lightspeed is a solid long-term bet.
Undervalued stock #3
Scotiabank (TSX: BNS) stock appears undervalued on the valuation front. Shares of Scotiabank trade at a forward P/E ratio of 10.7, which is lower than its peer group average of 12.2. Further, the stock’s price-to-book multiple of 1.1 is lower than all of its banking peers.
Scotiabank stock is trading at an attractive valuation and is likely to benefit from its diversified business lines, spanning Canadian and international Banking and Global Wealth Management. Higher revenue and operating leverage will enable Scotiabank to consistently deliver profitable growth, which will support its share price and dividend payments. Notably, this Canadian banking giant has been paying dividends since 1833 and has raised it at a CAGR of 6% since 2013. Further, it offers a high yield of 5.8%.
The financial services company’s low valuation, consistent earnings growth, solid balance sheet, and high yield make it a compelling investment.
