I Think These Bank Stocks and REITs Are Undervalued Right Now

Some “cheap” stocks are cheap for a reason, but these four look like cases where improving fundamentals may still be underpriced.

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 28, 5:00 pm EDT

| More on: CRT.UNEQBSRU.UNVBNK

Key Points

EQB could grow much faster if the PC Financial deal delivers millions of new customers and higher revenue.
VersaBank is a higher-risk wildcard, but U.S. expansion could drive meaningful earnings growth.
SmartCentres and CT REIT offer 5.5%–6.5% yields backed by very high occupancy and rising rents.

A stock hitting a new high can still be cheap. Another sitting 30% below its peak can still be horribly expensive. Annoying, I know. It would be considerably easier if the market simply slapped little clearance stickers on the genuine bargains. Instead, investors have to look at what they’re actually buying.

For banks, I care about earnings, return on equity, credit losses, and book value. A bank trading cheaply while returns deteriorate isn’t necessarily a bargain. For real estate investment trusts (REITs), regular earnings aren’t particularly helpful because property-value adjustments can make profits jump around. Funds from operations (FFO), occupancy, payout ratios, and the value of the underlying properties tell us much more.

That distinction feels especially useful now. Canadian financial stocks have rallied, while REITs are still recovering from years of higher borrowing costs. Yet there are pockets in both groups where I think improving fundamentals haven’t been completely reflected in the price. Here are four I like.

crisis concept, falling stairs — Source: Getty Images

EQB

EQB (TSX:EQB) isn’t exactly hiding anymore, yet I still think investors may be underestimating what its acquisition of PC Financial could create.

EQB stock operates Equitable Bank and digital challenger EQ Bank. Before the acquisition, EQ Bank already had 659,000 customers and more than $10 billion of deposits. The PC Financial deal is expected to expand EQB’s total customer base to roughly 3.3 million Canadians, and about $5.8 billion of assets, and nearly double revenue.

Second-quarter adjusted earnings per share (EPS) came in at $2.03 and its CET1 capital ratio remained a healthy 13.6%. Credit losses are the number I’d watch, particularly with weakness in Canadian real estate, but the opportunity is compelling enough that I’d keep EQB stock near the top of my list of Canadian bank stocks.

VBNK

VersaBank (TSX:VBNK) is considerably smaller, which also gives it more room to surprise. The branchless bank focuses heavily on business-to-business lending and has been expanding its Structured Receivable Program in the United States. Second-quarter revenue jumped 27% year over year to a record $38.3 million, while adjusted core net income increased 45%.

Its U.S. business is becoming particularly interesting. U.S. Structured Receivable Program assets reached US$604.9 million, and management is targeting another US$1 billion of U.S. funding during fiscal 2026.

Shares around $28 value the company at roughly 1.6 times book value. That’s not bargain-basement pricing, yet I’d argue the multiple still leaves room for a rerating if U.S. expansion turns into sustained earnings growth. The risk is exactly what makes the opportunity interesting. VersaBank is small, expansion costs money, and execution matters enormously.

SRU

Real estate is where the income gets much more interesting. SmartCentres REIT (TSX:SRU.UN) owns shopping centres across Canada, many anchored by Walmart. Its properties are places where Canadians buy groceries, prescriptions, toilet paper, and the other deeply unglamorous things that somehow keep showing up on my credit-card statement.

Occupancy reached 98.1% in the second quarter, while rents on renewed leases increased 12% excluding anchor tenants. Same-property net operating income rose 2.6%. Yet units around $28 provide a distribution yield of roughly 6.5%.

Higher interest costs remain a drag, and SmartCentres carries a large development pipeline. Still, near-full occupancy and rising rents make that yield considerably more attractive than the share price suggests.

CRT

CT REIT (TSX:CRT.UN) may be even less dramatic. Canadian Tire provides roughly 91% of its annualized base rent, while committed occupancy sits at an almost ridiculous 99.5%. Second-quarter AFFO per unit increased 2.5%, and the AFFO payout ratio was only 72.7%.

At roughly $18 per unit, its $0.98 annualized distribution produces a yield around 5.5%. Tenant concentration is the obvious risk. If Canadian Tire runs into serious trouble, CT REIT can’t simply shrug and call somebody else. Yet long leases, contractual rent increases, high occupancy, and a well-covered distribution create exactly the sort of boring cash flow I want from Canadian REITs.

Bottom line

None of these four needs the economy to suddenly become wonderful. EQB stock and VersaBank have company-specific expansion opportunities, while SmartCentres and CT REIT are already squeezing more revenue from highly occupied properties.

That’s usually where I want to look for value. Not where everything is going perfectly, but where the price still leaves investors something to gain when good businesses get even better.