Are you looking for undervalued stocks that are primed for big returns?
If so, I have some good news and some bad news for you.
The bad news is that such stocks are hard to find these days. Markets have risen so much at this point that the indexes are not cheap at all.
The good news is that isolated pockets of value still exist. If you look in categories such as small caps and energy, true value can be found. In this article, I share three undervalued Canadian stocks that might be primed for big returns.
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EQB
EQB Inc (TSX:EQB) is a small Canadian branchless bank. It is one of the rare stocks that is down in price this year, thanks in large part to the fact that its earnings declined this past few months. The company raises money by selling guaranteed investment certificates (GICs), and makes money by lending money to Canadian borrowers (businesses, homeowners, etc). The problem here is that the gap between short- and long-term lending rates is not currently very high, which has harmed EQB’s margins. The bank has also been reporting rising provisions for credit losses (PCLs).
Both of these problems are temporary. Canada’s yield curve will likely steepen in the future, and EQB’s rising PCLs are merely there to protect against potential losses. They reflect prudent risk management, not declining economic income.
Because of the supposed issues it has been facing, EQB stock is pretty cheap, trading at 9.5 times earnings. I think this is a reasonable price to pay for the stock, especially in this overheated market.
Suncor Energy
Suncor Energy Inc (TSX:SU) is a Canadian energy stock that has gotten beaten down due to perceived weakness in its most recent earnings release. In the most recent quarter, Suncor’s revenue and all of its profit metrics declined. This was due to low oil prices in the quarter just reported.
Will Suncor turn things around? It seems likely, given that demand for oil continues to rise while OPEC keeps supply at a moderate level (it is making output increases this year, but they are fairly small). For this reason, I think Suncor is a decent value at 11.5 times earnings.
goeasy
goeasy (TSX:GSY) is a Canadian lender that is also involved in retail. If you’ve ever seen those “EasyHome” stores in strip malls, goeasy is the parent company that owns them.
What goeasy does is twofold:
- It provides people with financing for medium-sized purchases (furniture, electronics, appliances, etc).
- It also sells the same types of items that it provides financing for.
The lease-to-own model provides EasyHome with two sources of revenue (financing and product sales), while EasyFinancial makes money strictly from lending.
It’s a model that has worked out well for goeasy, which has compounded its earnings at a 26% CAGR over the last five years, and which had a 35% profit margin in the trailing 12-month (TTM) period. Despite all of this growth, GSY stock is quite cheap, trading at 9.9 times earnings, 1.5 times sales, and 2.1 times book value. I think GSY is probably undervalued and a decent buy today.
