Undervalued stocks are attractive because they resonate with us at a “basic consumer mentality” level — i.e., buying something trading below its intrinsic value. However, the same principles may not apply to stock as to other material goods because, with stocks, perception is a significant factor in deciding and driving value up and down.
This is one reason that stocks that are too undervalued are not nearly as attractive to most investors as reasonably attractive stocks are.
They invoke a perception that there might be something fundamentally wrong with them. However, that perception is only sometimes on the right track, and with that in mind, investors should look into two brutally undervalued stocks trading in the Canadian markets right now.
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A lithium stock
From Canadians seeking ESG (environmental, social, and governance) investing opportunities to investors trying to leverage a solid bullish trend, many jumped on the post-pandemic momentum of stocks like Standard Lithium (TSXV:SLI). This particular stock rose by well over 2,500% in the post-pandemic market. A brutal correction phase followed this, though the current 80% discount cannot all be chalked up to a natural correction.
The renewable industry and electric vehicle (EV) sales have had some trouble in the last few years. Even though the total number of EV sales hasn’t slacked (yet), the growth is not as phenomenal as originally anticipated.
Many factors are in play here, but a consequence of this is that lithium, a critical ingredient in EV batteries, is experiencing a significant price drop. The global price of lithium has fallen roughly 80% from its 2022 peak.
Less-than-ideal EV sales numbers aren’t the only factor driving this trend. Promising hydrogen and fuel cell-based vehicles and the prospect of new, greener battery technologies are also impacting demand. As a result, stocks like Standard Lithium are struggling right now.
Even though it’s very attractively valued with a price-to-earnings ratio of 3.4, it might be a good idea to track lithium prices and demand before making a purchase decision.
An energy stock
Parex Resources (TSX:PXT) is a small-cap energy stock representing a company that trades in Canada but operates almost exclusively in Colombia. It has a massive local footprint and a strong position in the regional energy economy. This leadership position balances out the small market value concern many investors might have.
The stock is both heavily discounted and tastefully undervalued. It’s trading at a discount of over 51% and has a price-to-earnings ratio of just 3.8. It shows some signs of recovery, but potential recovery-fueled growth is not why you should consider buying this brutally undervalued stock. That credit goes to its phenomenal 11.1% yield. This is a direct consequence of its fall, which, in turn, is tied to its lower production projections.
A yield this high may look dangerous, especially for a stock that only started paying dividends a few years ago, but the payout ratios look solid. If the stock manages a healthy recovery, you can expect solid returns from both fronts: dividends and capital appreciation.
Foolish takeaway
The two undervalued stocks can have a profound impact on your portfolio’s overall performance if they deliver on their respective promising return potentials. But if you were to choose just one of the two, Parex might be a more secure choice, and it’s not just because of the return potential.
There are simply too many variables influencing Standard Lithium’s performance. Just one breakthrough (in hydrogen or battery technology) may cause lithium demand to slump for a long time.
