What is cheap in the stock market? Is it a loss-making company struggling for a turnaround for eternity but with a stock trading at $5 per share? Or is it a profitable company with significant growth potential and a robust business but trading at $20? Many beginners confuse price with value and buy 100 shares of $5 instead of five shares of $20. Remember, cheap stocks are not about buying a commodity like rice or milk where you go for quantity over quality for the same amount.
How to determine a cheap stock
The stock market meaning of cheap is buying a quality stock with good growth potential at a discount to its normal trading price. The identification of quality is visible from its ability to grow. Some companies are high-margin businesses where earnings growth can tell you the quality of stock. For instance, Nvidia is a high-quality stock with immense potential to grow earnings by selling the most advanced graphics processing units (GPUs).
Another example of a quality stock is Telus Corporation (TSX:T). The telecom operator has a vast 5G infrastructure and the third-largest subscriber base in Canada. The company spent significant capital in rolling out the fibre network and acquiring consumers. All these efforts reduced earnings in the short term. However, it has the potential to grow its profits by cross-selling products to its existing customer base, cutting costs, and reducing debt.
This Canadian stock hasn’t been this cheap in years
Telus can increase its subscription cost over time and pass on the benefit of rising cash flow from subscriptions to its shareholders through dividends. The company is trading at 18.95 times its forward earnings per share (EPS) as analysts expect Telus’s 2024 EPS to reach $1.05. The stock trades at a price-to-earnings (P/E) ratio of 22. The ratio fell as the stock price declined by 10% in December 2024 market bearishness. However, the company’s EPS is expected to increase as the company cuts costs and ends the price war that has been hurting its profit margins.
Moreover, interest rate cuts will bring opportunities to restructure debt, reduce interest expense, and boost EPS. The next two years could see a recovery in EPS. If we assume a 22 P/E ratio and a recovery in EPS, the stock is trading at a discount.
Telus stock is trading at its 2016 levels, creating an exciting buying opportunity. It has increased its dividend per share from $0.9 per share in 2016 to $1.609 per share in 2025. You can now get access to a 78% higher dividend for the same share price of $20.
What returns to expect from Telus
Telus stock price has slipped as its debt levels have surpassed its target debt levels. However, it has the cash flows to reduce its debt and the potential to increase its earnings by tapping the 5G opportunity. The 5G will create an opportunity for digital and artificial intelligence (AI) solutions, cloud networking, and higher subscriptions.
To help you understand the opportunity, analyze your broadband and mobile costs in 2010 and 2020. Over these 10 years, the way you access and use the internet has changed drastically and the amount you spend on various digital subscriptions has also changed.
Revenue and earnings growth is gradual in telecom. However, Telus keeps expanding its fibre network to new areas, growing its subscriber base and cash flow. The company has been growing its dividend at an average annual rate of 8% and has the capacity to continue growing it but at a slower rate for the coming 10 years.
Apart from dividend growth, Telus saw its stock price appreciate in the long term. Those who invested in Telus stock in 2016 saw their investment grow by 80% in the April 2022 peak as the company realized the full potential of 4G. It is now ready for the next cyclical growth, where it realizes the 5G potential.
