The Best Undervalued Stocks I’d Buy Right Now

Two TSX blue chips trading at modest P/E ratios may be priced for pessimism even as earnings improve.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 10, 4:10 pm EDT

| More on: GIB.AMG

Key Points

A low P/E is only attractive when the business is still growing profits and demand looks durable.
CGI looks cheap despite rising earnings and a huge backlog that should benefit from AI modernization work.
Magna is priced like a slowdown is permanent, even as margins and guidance are improving.

The stock market can hang a sale sign on a perfectly good business, or place it on a broken turnaround or a company whose main asset is optimism. Finding the bargain requires looking beyond the red price tag. Cheap and undervalued may be neighbours, but they certainly aren’t twins.

woman holding steering wheel is nervous about the future — Source: Getty Images

Look to the P/E ratio

The price-to-earnings (P/E) ratio can help investors judge whether a stock looks expensive or inexpensive compared with its history or that of other companies. It shows how much buyers pay for each dollar of earnings. A lower multiple creates more room for upside if earnings grow and the market eventually changes its mind.

The ratio can’t perform the entire job. A collapsing business may look wonderfully cheap because investors expect its earnings to follow the share price downstairs. I want a modest valuation paired with rising profits, durable demand, and a current reason the next few years could look better than the last few months.

I’d also buy gradually rather than attempting one theatrical bottom call. A cheaper entry helps, although diversification and patience remain essential when buying during a stock market correction. Two Canadian companies currently offer the combination I’m seeking.

CGI

CGI (TSX:GIB.A) provides technology consulting, systems integration, managed services, and software to governments and businesses. Its customers use CGI stock to modernize old systems, protect data, move operations to the cloud, and deploy artificial intelligence (AI) without turning an essential service into a very expensive science fair.

Demand is producing more than AI enthusiasm. Third-quarter diluted earnings per share (EPS) increased 22.5%, while backlog reached $31.8 billion, equal to approximately 1.9 times annual revenue. Government awards helped bookings exceed revenue over the past year, and enterprise AI should create additional work involving cybersecurity, data preparation, and system modernization.

At writing, CGI stock trades near 12.7 times trailing earnings and about 24% below its 52-week high. Revenue grew only 2.5% last quarter, so delayed contracts, government budget cuts, acquisition mistakes, or slower technology spending could keep the valuation low. I’d accept that risk for a profitable company repurchasing shares and converting long contracts into steadily rising earnings.

MG

Magna International (TSX:MG) supplies vehicle bodies, seating, powertrains, electronics, driver-assistance technology, and complete vehicle manufacturing. The auto cycle makes results lumpy, but Magna stock can earn from combustion, hybrid, and electric vehicles instead of betting the garage on one propulsion system.

Second-quarter sales rose 3% even as global light-vehicle production fell 2%. Adjusted earnings per share (EPS) increased 29%, helped by new programs, productivity improvements, and tariff recoveries. Management then raised its 2026 adjusted earnings and free-cash-flow outlook, suggesting the margin repair has more road ahead.

Magna stock equals roughly 10 times the midpoint of management’s US$6.70-to-US$7.30 adjusted earnings forecast after accounting for its exchange-rate assumption. Tariffs, weaker vehicle sales, customer price pressure, launch problems, and expensive technology investments remain serious risks. This is a cyclical bargain, not a suped-up deal masquerading as a bond.

Bottom line

I’d split an initial investment between these Canadian blue-chip stocks, then add more over several purchases. CGI stock offers contracted digital demand and AI modernization, while Magna stock provides margin recovery and exposure to the next generation of vehicles. If both keep growing earnings faster than their valuations imply, today’s modest multiples could give patient buyers considerably more upside than the bargain tags suggest.