Are you a Canadian investor looking to add undervalued stocks to your portfolio? With the current market volatility, finding undervalued stocks can be a challenge. However, it’s not impossible.
In this article, we’ll look at some of the most undervalued stocks in Canada. These stocks are currently trading below their intrinsic value, which means they can potentially provide significant returns in the long run.
Whether you’re a seasoned investor or just starting, this article will provide valuable insights into the Canadian stock market and help you make informed investment decisions.
What indicates it could be an undervalued stock?
A stock is considered “undervalued” when its current market price is lower than analysts believe its intrinsic value. Intrinsic value is a stock’s actual or estimated value based on its financial performance, industry outlook, management team, and other factors.
There are various reasons why a stock might be undervalued. For example:
Market overreaction: Sometimes, the market reacts too strongly to negative news or events, causing the stock price to drop more than it should. The stock may be undervalued because the underlying company’s financial performance or long-term prospects have not changed significantly.
Economic downturn: Many stocks can be undervalued during economic downturns or recessions due to market pessimism, despite the company’s strong financial position and prospects. This presents an opportunity for long-term investors to buy stocks at a discount.
Industry or sector weakness: If an industry or sector faces challenges or headwinds, the stock prices of companies in that industry may be undervalued due to market pessimism. However, if an investor believes that the industry will eventually recover or adapt to the challenges, they may see the undervalued stock as an opportunity to buy at a discount.
Financial performance: A company’s strong financial performance, such as consistently high revenue growth and profit margins, may make it undervalued if the market has not fully recognized its potential.
Overall, the key to identifying undervalued stocks is to look beyond short-term fluctuations in stock prices and focus on the long-term prospects of the underlying company, industry, and broader economic environment.
The Most Undervalued Stocks in Canada
These stocks are good long-term buys that may currently be undervalued companies.
Canadian Natural Resources Limited (CNQ)
This energy company has a diverse portfolio of assets, including oil sands, conventional crude oil, and natural gas. However, analystsDespite its strong financial performance; analysts consider CNQ to be undervalued because of its low price-to-earnings (P/E) ratio compared to other oil and gas companies.
Brookfield Asset Management Inc. (BAM.A)
This alternative asset manager has a global presence in real estate, infrastructure, renewable power, and private equity. Analysts consider BAM.A undervalued due to its consistent track record of generating long-term returns for its investors and its potential for growth in the alternative asset management industry.
Nutrien Ltd. (NTR)
As the world’s largest provider of crop inputs and services, Nutrien is well-positioned to benefit from the growing demand for agricultural products. Analysts consider NTR undervalued because of its attractive dividend yield and strong earnings potential, especially in the face of climate change and global population growth.
Canadian Pacific Railway Limited (CP)
This railway company provides freight transportation services across Canada and the U.S. Analysts consider CP undervalued due to its robust financial performance, strong management team, and potential for growth through acquisitions and expanding its reach in the U.S. market.
Enbridge Inc. (ENB)
As one of North America’s largest energy infrastructure companies, Enbridge provides transportation and storage services for oil, natural gas, and renewable energy. Analysts consider ENB undervalued due to its attractive dividend yield and strong financial position, despite challenges in the energy industry, such as regulatory hurdles and transitioning to renewable energy sources.
Royal Bank of Canada (RY)
As one of Canada’s largest banks, perhaps the best Canadian bank stock, RY provides various financial services, including personal banking, wealth management, and investment banking. Analysts consider RY undervalued due to its strong financial performance, diversified business model, and attractive dividend yield.
Teck Resources Limited (TECK)
This mining company produces a range of commodities, including copper, zinc, and coal. Analysts consider TECK undervalued due to its low P/E ratio compared to other mining companies, strong financial position, and potential for growth in the renewable energy and electric car stocks Canada has in vehicle markets.
Telus Corporation (T)
This telecommunications company provides wireless and wireline services to consumers and businesses in Canada. Analysts consider T undervalued due to its strong market position, attractive dividend yield, and potential for growth in its wireless and fibre-optic broadband businesses.
Suncor Energy Inc. (SU)
As one of Canada’s largest integrated oil and gas companies, SU operates in the exploration, production, refining, and marketing of petroleum products. Analysts consider SU undervalued due to its low P/E ratio compared to other oil and gas companies, strong financial position, and potential for growth in renewable energy and low-carbon technologies.
Shopify Inc. (SHOP)
This e-commerce company provides small and medium-sized businesses with a platform to create and manage their online stores. Analysts consider SHOP undervalued due to its long-term growth potential, dominant market position, and increasing shift towards online shopping.
How to Find Undervalued Stocks?
Here are some steps to find potentially undervalued stocks; the more you practice looking for them, the better you’ll get!
Identify a List of Stocks: Start by identifying a list of stocks you are interested in investing in. Then, you can use financial news websites or online brokerage platforms to research stocks and build a list of companies you want to analyze.
Conduct Fundamental Analysis: Once you have a list of stocks, you can conduct fundamental analysis by looking at key financial metrics such as revenue growth, profit margins, return on equity, and debt-to-equity ratio. You can also analyze the company’s competitive landscape, management team, and long-term growth prospects. This analysis will help you determine whether a stock is undervalued based on its intrinsic value.
Compare Key Metrics: To identify undervalued stocks, compare the key financial metrics of the companies on your list to their historical averages and industry peers. For example, look for stores with a lower P/E ratio, a higher dividend yield, or a lower P/B ratio than their industry peers or historical averages.
Look for Market Overreactions: Sometimes, the market overreacts to negative news or events, causing the stock price to drop more than it should. Look for stocks that have dropped significantly due to market pessimism but that you believe have strong long-term prospects. A great example of this is when Canadian bank stocks are dropping causing them to become undervalued; because of their nature, they are almost always a good long-term investment.
Monitor Market Trends: Keep an eye on market trends and economic indicators that could affect the performance of the stocks you are interested in. For example, changes in interest rates, shifts in consumer behaviour, or changes in government policies could all impact the performance of specific stocks or industries.