Although the TSX Composite Index is near all-time highs, it has plenty of individual stocks that are squarely in the value category. Whether due to being seen as risky or just plain overlooked, they trade very cheaply compared to their assets and earnings. In fact, there are even some TSX stocks out there that are not just value, but deep value. These stocks trade at such absurdly low ratios to their assets and earnings that they can deliver superior returns if all goes well. In this article, I will explore three deep value stocks that Bay Street is practically giving away.
Air Canada
Air Canada (TSX:AC) is a stock you might be surprised to see on this list. The nation’s largest airline and only international airline is a household name. Yet when you look at its stock price and financials, you will see that it is in fact a deep value stock.
Air Canada stock currently trades for $19.25. Beneath that $19.25 price tag, it has:
- $62 in revenue per share.
- $4.49 in earnings per share.
- $6.46 in free cash flow per share.
So, the stock trades at:
- 0.3 times sales.
- 4.3 times earnings.
- 3 times free cash flow.
These multiples are extraordinarily low.
Given that Air Canada is a major Canadian company, why is it this cheap?
For one thing, there might be some post-COVID shell shock going on here, whereby people are shying away from airlines due to the poor performance they delivered in that period. Second, oil prices have been volatile this year, and some worry that high jet fuel prices will take a bite out of AC’s earnings. Third and finally, the company faced some labour disruptions this year (though they are resolved now). These issues don’t look likely to last long. So, I’d be comfortable owning AC stock today.
First National
First National (TSX:FN) is a Canadian financial stock that trades at about 10 times earnings. This one might be stretching the definition of “deep value” a little, as it’s only a moderately cheap name. However, it has some deep value characteristics and also some growth, which gives it a PEG (price/earnings/growth) ratio of 0.9 – that ratio is quite low.
First National is a non-bank mortgage lender. It specializes in issuing mortgages to Canadians who might not normally qualify for bank loans. The company’s earnings increased a lot over the last few years because of the Bank of Canada’s rate hikes, along with other factors. With the Bank of Canada now cutting rates, we’d expect FN’s earnings to decrease somewhat. However, with a 64% payout ratio, the company can afford to take a minor hit to earnings and still keep the dividends coming.
Reitmans
Reitmans (TSX:RET) is a Canadian clothing retailer that mainly serves women customers. In more recent years it has branched out, buying up chains like RW & Co that serve both men and women.
Going by the multiples, Reitmans is a true deep value stock, trading at 7 times earnings, 0.2 times sales and 0.5 times book value. This stock is not cheap for absolutely no reason. Its revenue is down from 2019, but has been trending upward for the last three years.
The reason why Reitmans got hit hard is because it suffered major damage during the COVID-19 lockdowns. Most of its stores were forced to shutter, and it had to take on new debt to stay afloat. This caused the company’s earnings to tank. However, the company has been recovering nicely over the last few years. It is certainly riskier than the other two stocks on this list, but might be worth a look.
