There are some sectors and companies I’d put in the “cheap” bucket right now, at least relative to where stocks are broadly trading. However, finding companies one would put in the “dirt-cheap” category of undervalued stocks — that’s a much bigger lift.
That’s because broadly speaking, valuations have continued to rise as investors expect outsized earnings growth from companies large and small. The rise of artificial intelligence and other technologies has investors considering a future in which less capital and resources are needed to produce the same (or greater) outputs. If that’s the case, profitability could be poised to shoot through the roof, and these multiples make sense.
However, if you’re skeptical of this recent rally (as I am) and are looking for truly deep value right now, here’s one company to consider.
Source: Getty Images
Whitecap Resources
Canadian oil and gas producer Whitecap Resources (TSX:WCP) is among the cheapest stocks in this sector, which really says something. That’s because many of the top names in the energy sector continue to trade at depressed multiples, as growth investors focus their attention on tech and other sectors (for obvious reasons).
The company’s share price has been relatively flat over the past year, despite a move of more than 200% over the past five years. In that sense, the chart above can be difficult to parse for the average investor, considering whether right now is a good entry point to add exposure to such a name.
I’d argue in the affirmative for Whitecap, given the company’s commitment to shareholder returns and prudent capital-allocation profile. This makes the company a notable choice for income-oriented investors and suggests to me that the longer-term trends underpinning this stock could be in place for some time to come.
Solid fundamentals could drive a rally higher
In most sectors, but in the energy sector in particular, I think most investors will be closely attuned to fundamentals when picking individual stocks. In that sense, Whitecap looks well-positioned for a continued move higher.
That’s because recent earnings for the company have been robust, with Whitecap seeing 3-5% annual earnings growth driven mainly by production and cost-efficiency improvements over time. That’s not the kind of knock-it-out-of-the-park growth other tech companies can provide. But given Whitecap’s solid balance sheet, its ability to grow cash flows at an outsized pace could mean this stock will get cheaper over time, even as its share price rises. I’m after opportunities like this.
Additionally, I think there will be greater investor demand for companies like Whitecap that provide dividend yields in excess of 6% that can grow their buyback and dividend base over time. With strong fundamentals which point toward continued buyback and dividend hikes over time, this is a no-brainer stock to consider at current levels, in my view.
