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A Special Report

5 CHEAP AND GOOD STOCKS FOR 2020

5 Cheap and Good Stocks for 2020

Fellow Investor,

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But first, let’s look at 5 companies trading at “cheap” (in our mind) valuations that all look to us to be good bets for investment dollars right now.

Here are the companies that made our list. We think each boasts significant long-term growth prospects (and some even currently pay hefty dividends). In other words, these are companies that could hit the ‘sweet spot,’ potentially setting you up for years of capital gains and a steady stream of income!

Let’s get started…

So, without further ado…

Stock #1: Bank of Nova Scotia (TSX: BNS)

Company snapshot

Market Cap: $88B
Current Dividend yield: 5%
Recent Price: $72.29
Data as of: 1/16/2020

A generation of Canadian investors have made wonderful returns by investing in Scotiabank and the rest of the Canadian banks. But you sure wouldn’t know it by the broad-based negativity that tends to swirl around this collection these days, with Scotiabank serving as ground zero, in our opinion.

And now, with the U.S. president toying with Mexican tariffs, and Scotiabank having rather significant Mexican operations, negativity has turned to outright hatred for this company and its stock. Today, Scotiabank sports a financial crisis-like valuation, which is rather unbelievable given we’re nowhere close to a financial crisis-like situation.

With this valuation in hand, losing money on an investment in Scotiabank over the next five years will require a scenario to take hold that’s unlike any other that’s occurred since the mid-90s. At least, as that’s as far back as our data goes.

Presently offering a roughly 5% dividend yield, and a price/book multiple that our analysis indicates should not go any lower than it is… the stock today meets the textbook definition of a defensive setup. Considering the bank’s valuation, in our opinion, downside is extremely limited. Patience is key, but if you’re looking for a position that’s likely to navigate through choppy waters better than most, Scotiabank is your ride.

Stock #2: Fairfax Financial (TSX: FFH)

Company snapshot

Market Cap: $16.5B
Current Dividend yield: 2.1%
Recent Price: $616.71
Data as of: 1/16/2020

Fairfax, as an insurance company, runs a fairly straightforward business. As you know, severe weather leads to property damage, and one doesn’t have to pull too hard on the thread before insurance companies become involved! When it comes to flood-related property damage, insurance companies are on the front line. After all, that’s why they exist.

Fairfax is currently enjoying mid-single-digit price increases on the back of the harsh weather environment that’s existed for the past couple years. It’s something that we think should lead to improved profitability in the years ahead as conditions normalize.

Insurance, though, is but one piece of this and every insurance company. When it comes to Fairfax, while we want to see a profitable insurance business, the investment portfolio tends to carry more sway. On this front, in our minds, significant potential exists. For one, the portfolio is loaded with liquidity in the form of cash and short-term U.S. Treasuries. In addition, we’re rather fond of several of the largest equity positions in the portfolio.
Tossing a blanket over it: we have an insurance business that we think is poised to benefit from the current pricing environment, and boasts an investment portfolio that probably doesn’t get the recognition it deserves.

To put it another way, with Fairfax, we have a relatively stable underlying business that’s combined with somewhat of a coiled spring of an investment portfolio. It’s trading at a highly attractive valuation given the potential. All in, it’s a situation that you should feel very good about buying and not thinking about for the next five years.

Stock #3: Hardwoods Distribution (TSX: HDI)

Company snapshot

Market Cap: $359M
Current Dividend yield: N/A
Recent Price: $16.84
Data as of: 1/16/2020

Hardwoods, as you might guess, distributes hardwood lumber, plywood, medium density fiberboard, melamine, particleboards, and specialty products to the industrial retail markets in North America. Yawn fest, right?

Not so fast. We think this is a great little business. More importantly, though, for our purposes, it’s a great little business that in our minds has been entirely mistreated by the market. This assault has come on a couple of fronts. First, a U.S. trade beef against Chinese hardwood plywood caused some to flee. The thing is, from the get-go, it was foreseeable this would only be a temporary issue. Margins have been impacted, but we see normalization is already on the horizon. A return to more normal levels in the quarters (yes, quarters) ahead will have this matter firmly in the rear-view mirror.

For this, we’re being asked to pay multiples that are well off the highs we’ve seen over the last 5 years. An only slightly more supportive macro environment could lead to big gains from here on multiple expansion alone. In our opinion, it’s an opportunity not to be missed.

Stock #4: Magna (TSX: MG)

Company snapshot

Market Cap: $21 billion
Current Dividend yield: 2.7%
Recent Price: $69.42
Data as of: 1/16/2020

A Canadian company that we believe probably doesn’t get nearly the recognition it deserves for its presence in the global auto industry, Magna and its stock have come under significant pressure in recent months in what has been a difficult spell for all things auto. Admittedly, we shared some of the broadly held concern as it pertained to the North American trade situation (you know, the former NAFTA). Even though the company has a global footprint, North American operations are very material. Seemingly, though, we’re past all of this and the adverse scenarios that Magna faced no longer exist.

The thing is, the apparent end of Magna’s troubles really hasn’t had any impact on the stock. This remains a stock market that’s not keen on auto anything, and this seems like an opportunity to us. There is a valuation case here that’s increasingly just too darn attractive to pass up in our view.

At its current valuation, what we have here is a tremendous company at a very fair price. Somebody named Warren Buffett once said something about these kinds of situations. To paraphrase, “Buy them.”

Stock #5: Pulse Seismic (TSX: PSD)

Company snapshot

Market Cap: $99.5 million
Current Dividend yield: N/A
Recent Price: $1.85
Data as of: 1/16/2020

We believe that oil and gas will continue to play a significant role in the global energy space for decades to come. And yet, we find it a real challenge to invest in companies that produce these resources, so we tend to focus our attention on other industry players to gain exposure. Pulse Seismic is a perfect example of a company that we feel will continue to benefit from the ongoing production of oil and natural gas in Western Canada, yet it offers a business model that is far more dependable than that of your typical exploration and production (E+P) company.

As its name suggests, Pulse Seismic owns and manages a library of seismic data that pertains to, and is integral to, oil and gas exploration and development in Canada. What’s more, Pulse is now the largest owner of seismic data in the whole country—as Pulse recently announced that It had completed the acquisition of Seitel Canada, which had been the other significant owner of seismic data in the nation. So this move essentially doubles the amount of 3D data in Pulse’s library and nearly doubles the 2D data!

While Pulse Seismic’s regular quarterly reports haven’t been all that fun in recent, well, years, the special announcements that the company has put forward certainly have been. At a time when the rest of the industry has turtled, Pulse has leveraged its financial prudence in recent years to position itself, in our opinion, to be a significantly improved company once the current malaise passes.

That’s the key to this whole scenario, and we think patient investors are likely to be rewarded.

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Disclosure: Fool contributor Taylor Muckerman owns shares of MercadoLibre, Shopify, and Veeva Systems. David Gardner owns shares of MercadoLibre. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of MercadoLibre, MTY Food Group, Shopify, and Veeva Systems. Iain Butler owns shares of MongoDB and Shopify. Returns as of Jan. 16, 2020.