With the TSX Index up more than 55% so far this year, it might seem that there are no reasonably priced value stocks anymore. Yet, there’s always a company or industry that’s going through a hard time. If you dig deep enough, you can find these companies and snatch them up while they’re trading at value stock valuations.
Let’s take a look at two such Canadian value stocks that I believe are setting up to be outperformers in the next year.
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Cineplex
We all know Cineplex Inc. (TSX:CGX) as the dominant movie exhibition company in Canada. But what many of us don’t know is that Cineplex is more than that. It’s a diversified entertainment company whose movie exhibition segment currently accounts for 78% of total revenue. Other revenue sources include Cineplex’s location-based entertainment segment, which hosts activities such as video gaming, bowling, and dining.
Today Cineplex is a Canadian value stock that emerged after some very difficult years. First, the pandemic threatened Cineplex’s very survival, and then the writer’s strike dried up movie content and kept the company in the red. As a result of all of this suffering, there is a silver lining, however. We now have the opportunity to buy Cineplex at historically cheap valuations. In fact, given Cineplex’s cash flow generating capacity and relative stability, the stock is one of the best value stocks out there.
Trading at a mere 14 times next year’s earnings, Cineplex stock is not reflecting the likely ramp up in earnings and cash flow in the next year. The company’s recent box office results highlight the growing momentum and positive potential. In Cineplex’s latest quarter, box office revenue came in at 98% of pre-pandemic levels. In November, it came in at 94% of pre-pandemic levels. So we can see that a full recovery to 2019 levels is in the cards. Yet, Cineplex stock trades at a fraction of what it traded at then – more than 60% lower. A true value stock.
Enbridge – the perpetual value stock
Enbridge Inc.(TSX:ENB) has been a value stock for a long as I can remember. There’s something about the pipeline business that has turned investors off. Maybe it’s the trouble that these companies had in the approval process of new pipelines. Or it’s the high capital intensity of the business. It could also be the push for clean energy.
In reality, it’s probably a bit of all these reasons. But whatever the reasons, the fact is the Enbridge stock remains a value stock. Trading at 19 times next year’s expected earnings, this value stock has so much more potential than investors give it credit for.
Firstly, it is a defensive stock. In fact, its acquisition of three U.S. gas utilities from Dominion Energy add low-risk, regulated revenue streams to Enbridge. This adds greater stability to the company, further de-risking its growth outlook.
Secondly, Enbridge is benefitting from the growth in the natural gas business. Global demand for North American liquified natural gas (LNG) and new data centre demand will continue to fuel its pipeline business for years to come.
Finally, Enbridge has a business model that churns out predictable, recurring cash flow, with plenty of growth to be had. Enbridge stock remains a Canadian value stock that does not seem to reflect these realities.
