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The Best Undervalued Stocks In Canada

We will update this Best Stocks In Canada list as earnings release and as prices fluctuate. They may not reflect the latest price by the day, but we update it frequently.

(Updated Jan 31, 2023) Given the inflationary and rising interest rates environment we’re in, we think the best stocks in Canada right now are those of companies with shareholder alignment and high current profits compared to share prices. This points to looking at best stocks candidates in undervalued stocks.

What Is An Undervalued Stock

An undervalued stock is a security that is trading at a price lower than its fair market value. Undervalued stocks may present an opportunity for investors to purchase the stock at a discount, with the expectation that it will rise in price once more in line with its intrinsic value over time.

Investors typically use fundamental analysis to identify undervalued stocks. This involves looking at the company’s financial health and its potential for growth, as well as analyzing how it compares to other companies in the same industry.

When searching for undervalued stocks, investors should also consider the risks involved with investing in a particular company. The stock may be undervalued for a reason, so it’s important to do your research and understand what you’re buying into.

Our Methodology For The Best Undervalued Stocks In Canada

We’ve applied a different methodology and search criteria per industry or sector, and they can be found here:

Best Telecom Stocks In Canada

Best Consumer Stocks In Canada

Best Financial Stocks In Canada

Best Energy Stocks In Canada

Best Industrial Stocks In Canada

We have applied methodologies to other sectors such as Technology, Basic Materials, Utilities, Healthcare and Real Estate as well. Not a single stock made it past the filter, so we didn’t end up writing the article. Technology, for example, had no company with high enough earning yields. This can be translated as saying that the valuations are just still too high.

In Real Estate, we found that the balance sheet were so debt ridden that these companies leave their unitholders (they’re often REITs) with very little equity and margin. They also are exposed to interest rate risk as the debt portfolio renews. God forbid, some of them might even be on variable interest rate vehicles.

The issue with Healthcare was profitability. Most companies aren’t profitable enough in that sector right now. Basic Materials have more systemic failures, such as the lumber industry having a tradition of being systemically unprofitable. There was one steel producer that caught our eye, but we chose to ignore it because it was unprofitable before the pandemic.

Our Curated List Of The Best Undervalued Stocks In Canada

None of the names should be a surprise if you’ve read our series per industry sector. Here we’ve ranked the 10 best names by free cash-flow yield:

1. Manulife Financial Corporation

MFC, with the best PE ratio of the financial group at 6, 39% free cash-flow yield and 5% dividend yield, Manulife Financial Corporation seems to be the lowest risk of all in this high earnings yield group, with a price to book ratio of 0.9x.

Manulife Financial is a Canadian insurance company that provides financial services to individuals, businesses, and organizations. It offers life and health insurance, as well as pension and investment management services. Manulife Financial also has operations in the US, Asia, Europe and Australia.

2. Canadian Imperial Bank of Commerce

CM, at 39% FCF yield. CIBC also has a great risk vs. potential reward profile, with the caveat that they’re currently diluting the shareholder base to raise capital to meet certain industry capitalization regulation standards. They have the upside of potentially being purchased, as they are a smaller player in the financial space in Canada, in terms of Market Capitalization.

CIBC is a leading Canadian-based financial institution with 11 million personal banking, business banking and wealth management clients around the world. It offers a full range of products and services through its comprehensive electronic banking network, branches and offices across Canada, in the United States and around the world.

3. Vermilion Energy Inc.

VET, at 31% free cash-flow yield, is the 3rd best.

Vermilion Energy is an oil and gas production company that explores, develops and produces crude oil, natural gas liquids (NGLs) and natural gas. They focus on producing light to medium gravity sweet crude in Western Canada, the United States, Australia/New Zealand and Europe.

Vermilion’s operations also include marketing, transportation services related to its properties as well as third party marketing of other producers’ volumes.

4. Power Corporation of Canada

POW, a 30% free cash-flow yield beast, just missed the podium of the best stocks in Canada, ranked by how undervalued they are.

Power Corporation of Canada is a diversified international management and holding company with interests in companies in the financial services, communications, and other industries. The company was founded in 1925 and is headquartered in Montreal, Quebec, Canada.

Power Corporation has operations in North America, Europe, and Asia, and its subsidiaries include financial services companies such as Great-West Lifeco and IGM Financial, as well as communications, media companies and alternative investments branches.

5. Yellow Pages Inc.

Y, at 27% free cash-flow yield, makes the top 5. It also gives a fair dividend at more than 4%.

Yellow Pages Inc. is an online business directory and marketing company that provides businesses with information, resources, and tools to help them achieve success in their markets. The company partners with local advertisers across multiple channels such as print, mobile search services, digital advertising solutions and more – providing powerful options for growing their customer base.

They offer a range of products including SEO/SEM services (search engine optimization & search engine marketing), website design & development as well as targeted email campaigns for building brand awareness and increasing sales promotions.

This company underwent a massive restructuring and still carries heavy debt and employee liabilities to this day, but it seems like the worst is over.

6. Birchcliff Energy Ltd.

BIR, at a free cash-flow yield of 26%., is next. It has a dividend yield of 9.5%.

Birchcliff Energy is a publicly traded, Calgary-based oil and gas exploration and production company focused on natural gas. It has operations in the Montney formation of northwestern Alberta, as well as in BC’s Peace River High region and northeastern British Columbia’s Deep Basin.

Its activities include drilling; gathering, compressing and processing of associated hydrocarbon liquids; storage of processed products; transportation by pipeline or trucking infrastructure to field sales points or export facilities; fractionation/refining for condensate (C5+); water management services; construction activities like site preparation for drill pads & midstream infrastructure construction contracts are available through its subsidiaries.

7. Reitmans (Canada) Limited

RET, at a 22% free cash-flow yield. Reitmans takes the 7th place in the overall group. Yes, they emerged from restructuring proceedings in January 2022. Yes, it’s a retailer. But 22% is great! The only problem is that they’ve increased 70% in share price since we’ve included them on this list, representing less of a bargain now.

Reitmans is a Canadian fashion retailer for women, founded in 1926 by Herman and Sarah Reitman. The company operates several hundreds of stores throughout Canada, with its main brands including AdditionElle, Penningtons, RW&CO and Thyme Maternity. As well as selling clothing items such as jeans, dresses and blazers, Reitmans also sells accessories like jewelry and handbags.

8. ARC Resources Ltd.

ARX, at 27% free cash-flow yield, made the eighth position of the best stocks in Canada, ranked by how undervalued they are.

ARC Resources Ltd. is a Canadian energy company that specializes in the exploration, development, and production of oil and natural gas. The company has operations in Alberta, British Columbia, and Saskatchewan.

Their main focus is on unconventional and conventional oil and gas plays, and they have a portfolio of high-quality, long-life assets that offer stable production and development opportunities. ARC Resources Ltd. produces approximately 150,000 barrels of oil equivalent per day and has approximately 1.2 billion barrels of oil equivalent of proved and probable reserves.

9. The Toronto-Dominion Bank

TD, at a free cash-flow yield of 24%. The Toronto-Dominion Bank is the penultimate of the high FCF yield group.

Toronto-Dominion Bank (or TD Bank) is a Canadian multinational banking and financial services company headquartered in Toronto, Ontario. It operates primarily across Canada, but also has operations in the United States. The bank was created through the merger of two banks in 1955 -The Bank of Toronto and The Dominion Bank. With total assets of over CAD $1 trillion as of October 2020, it is one of Canada’s Big Five banks, along with RBC Royal Bank, Scotiabank, CIBC and BMO Financial Group.

10. Sleep Country Canada Holdings Inc.

ZZZ, at a free cash-flow yield of 17%, is our last entry.

Sleep Country Canada Holdings Inc. is a publicly traded company and the largest mattress retailer in Canada. It operates under the Sleep Country and Dormez-vous banners, offering a full range of sleep products and accessories, including mattresses, box springs, pillows, bed frames, bedding and more.

The company also provides a wide variety of mattress and sleep-related services, such as sleep-testing, mattress recycling and delivery. Sleep Country Canada Holdings Inc. has over 220 stores located across Canada.

Honourable Mentions For Best Stocks In Canada:

Wajax Corporation, Cenovus Energy Inc. and Royal Bank of Canada all range between 12% and 16% FCF yields and are all Canadian blue chips.

We’ve discussed them more specifically in our earlier per sector / per industry series (links in the Methodology section above). We encourage you to do your research on every one of these companies to assess their long term sustainability and business models. 


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