When you’re looking for high quality value stocks to buy, it helps to pay close attention to those that have been heavily sold off in recent years. While a stock going down doesn’t necessarily mean that it is cheap in the valuation sense, many stocks with attractive valuations are found in the “oversold” pile. One reason for this is loss aversion: people fear losses more than they desire gains, and so they tend to flee from companies going through temporary problems. The fact that such problems are often temporary escapes people: they just know that the situation is painful and they want the pain to end.
So, stocks seeing heavy selling, particularly when the heavy selling is caused by an overreaction to bad news, often have quality value plays hidden amongst them. The question is how to find them. The true answer, unfortunately, is that they’re often found only after many months of in-depth research. With that said, I have noticed one stock that has been trending down in price since 2023 and widely underperforming the TSX which might just be a diamond in the rough. In this article, I explore one oversold TSX stock that is poised for a comeback.
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Alimentation Couche-Tard
Alimentation Couche-Tard Inc (TSX: ATD) is a Canadian gas station/convenience store company that is best known for operating the Circle K chain. Alimentation bought Circle K from ConocoPhillips in 2003 as part of its expansion strategy. It brought the U.S. chain to Canada, and expanded it from coast to coast, while keeping the original U.S. business intact. As a result of this strategy, Circle K grew to become the second biggest convenience store chain in the world, with 7,230 stores worldwide. Alimentation operates other chains too, such as Couche-Tard in Quebec and a European Circle K chain.
Alimentation’s strengths
Alimentation has a lot of things going for it as a company. Its biggest asset is its approach to capital allocation. Throughout its history, ATD has grown by re-investing its earnings and taking on only small amounts of debt, rather than heavily leveraging to get deals done. As a result, the company has generally paid low dividends, but has also managed to retain a pristine balance sheet, with a debt to equity ratio of about one. For a company that has expanded as much as ATD has over the years, that’s a relatively low ratio, indicating fiscal discipline.
Recently, ATD made some moves that got people questioning whether they had lost their touch on capital allocation. Specifically, the company attempted to buy Japan’s Seven & I, the owner of 7/11, for $47 billion. The amount offered was greater than ATD’s total equity, and 82% of its total assets. To close, the deal would have required taking on a massive amount of debt. It seemed to indicate that Alimentation was breaking with its established tradition of disciplined capital allocation.
7 & I deal thwarted
Alimentation Couche-Tard’s Seven & I deal was in fact risky. It could have sunk ATD stock. But thankfully, relief on that front came when Japan’s government refused to approve the Seven & I takeover bid. That resulted in ATD withdrawing the bid, ending the entire drama over Seven & I permanently.
Fuel prices rising
Another thing ATD has going for it right now is an admirable position as a supplier of road fuel. As a gas station company, ATD makes as much money at the pumps as it does inside its stores selling beer, chips, and lotto. Fuel prices are generally rising across Canada, and that should translate to higher road fuel revenues and earnings for the current quarter. We’ll have to wait a few months for ATD’s first quarter earnings release to actually go live, but once it does, we could have a catalyst for future gains in ATD’s stock price. For this reason, I’d be comfortable owning ATD stock today.
