Investing in Canadian value stocks for growth might sound like a contradiction in terms. Isn’t value investing the opposite of growth investing? According to conventional categorizations, it is, but the distinction is illusory. All investing is value investing. In classic value investing, you seek a low price-to-earnings (P/E) ratio using next year’s earnings in the denominator. In disciplined growth investing, you seek a low P/E ratio with earnings a few years out in the denominator. Ultimately, you’re seeking to get more than what you pay for. With that in mind, here’s where I’d allocate $10,000 in Canadian value stocks for future growth.
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Banks
If you’re investing in Canadian value stocks, the big banks are natural assets to consider. They generally trade at low multiples compared to the TSX index as a whole, usually 10 to 15 times earnings. In recent years, they’ve been trading closer to the high end of that range (15 times earnings), but you can still find Canadian bank stocks trading closer to 10 times earnings. TD Bank is one example.
Non-bank financials
Another good sector to look at if you’re investing in Canadian value stocks is non-bank financials. Non-bank financials are financial services companies involved in asset management, insurance or brokerage, but not banking. Many bargains can be found among non-bank financials.
Consider Brookfield Corp (TSX:BN), for example. If you take the market value of all of Brookfield’s listed assets and subtract the value of the company’s corporate-level debt, you end up with a figure lower than Brookfield’s market cap. This implies that Brookfield is trading at a sum of the parts (SOTP) discount, which indicates undervaluation. Now, usually, conglomerates trade at a discount to the value of all their assets net of debt because conglomerates add extra layers of taxation and bureaucracy. However, the discount is particularly large in BN’s case.
One great thing about Brookfield is that in addition to it having a cheap valuation, it also has growth. In the most recent quarter, Brookfield’s distributable earnings grew 20% year on year. The company’s insurance segment grew especially quickly. So, this is one Canadian value stock to invest in for future growth.
Energy
Last but not least, those investing in Canadian value stocks for future growth would be well advised to look at the energy sector. Canadian energy stocks have taken a beating this year, but their fundamentals remain intact. Oil prices are down this year primarily due to Trump tariffs. With Donald Trump facing increasing pressure at home and abroad, he will probably have to change his tariff policies sooner or later. When that happens, demand for oil will come back. And that will line the pockets of Canadian energy companies.
Investing in Canadian value stocks: The foolish takeaway
The bottom line of investing in Canadian value stocks is you have to know which sectors to buy. Some sectors are simply cheap; others are cheap for a reason. If I had to invest $10,000 in Canadian value stocks today, I’d spread the money across banks, non-bank financials and energy stocks. It may not be the most exciting portfolio allocation, but it has promise.
