The name of the game in investing is generally to find undervalued stocks that investors think can appreciate significantly over time, buy those stocks, and hold them for an extended period. Holding for a long period of time can ensure near-term volatility is muted in terms of each given stock’s impact on an overall portfolio. And since most companies head up and to the right over time (so long as their earnings and cash flow follow that trajectory), this is the winning strategy most investors employ.
That said, determining which stocks are truly undervalued is the difficult part. In this article, I’m going to highlight three Canadian stocks I think are uniquely underpriced relative to their earnings potential, and why.
Let’s dive in!
Source: Getty Images
Whitecap Resources
One Canadian energy stock I’ve continued to pound the table on of late, particularly from a valuation standpoint, is Whitecap Resources (TSX: WCP).
Shares of the Western Canadian oil and gas producer have been moving in the right direction over the medium term. Indeed, the more than 350% return investors have received from owning WCP stock over the past five years is certainly something worth writing home about.
Now, shares of WCP stock are also down over the past 12 months. This move comes as energy prices have come under pressure of late.
This move has also pushed Whitecap’s valuation multiples lower, with the company now trading at a price-to-earnings ratio of 7.3 times, despite strong cash flow growth in this still-elevated commodity price environment.
For those looking to hedge against inflation and want to consider a company with strong cash flow growth potential (even with oil and gas prices where they are today), this is a value stock to consider right now in my books.
Air Canada
Perhaps the most consistently undervalued stock on the TSX, at least in recent years, Air Canada (TSX: AC) is a divisive stock for some investors. Rightly so.
Major airlines like Air Canada have felt the brunt of the market’s pushback on tariffs and other trade policies, which have made living more expensive. The thinking among some investors is that if prices overall rise too fast, spending on travel and other non-essentials could tail off. For an international airline like Air Canada, this global dynamic isn’t a positive.
However, the fact that AC stock is now trading at a trailing price-to-earnings multiple of just 4.6 times doesn’t make sense to me. This is a company that has traded at a double-digit multiple during good times. And while various overhead costs do appear poised to rise as well (limiting the company’s cash flow growth potential, alongside its heavy debt load), it’s also true that if consumer spending remains strong, this is a company that could be looked to as a cyclical bet on this bull market remaining in place.
At its current valuation, that’s a risk/reward bet many investors may want to consider.
Suncor Energy
I thought I’d wrap up this piece with another top Canadian energy stock. Suncor Energy (TSX: SU) is one such company I’ve long thought has been undervalued. That view hasn’t changed.
Looking at the chart of Suncor stock above, it’s clear Suncor has had some very strong momentum of late. Much of this has to do with the company’s strong cash flow growth profile in the current commodity price environment. And with more free cash flow, the company has been able to pay down debt and accelerate its cash flow growth trajectory over time.
That’s something I like. Strong fundamentals matter a great deal to long-term investors looking for value, dividend growth (current yield of roughly 4% isn’t bad) and capital appreciation upside. Suncor provides all three in my view.
