10 Canadian stocks now at a discount

After this week's market plunge, 46 Canadian stocks are trading below our fair value estimates.

Ruth Saldanha 12 October, 2018 | 5:00PM
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This week has been a bloodbath for most major stock markets globally, and the Canadian markets are not insulated from this; the S&P/TSX Composite Index has lost 3.9% between Tuesday and Thursday.

It's important to remember that there is nothing fundamentally driving the drop in the Canadian markets; the market fall was largely driven by global sentiment. As of market close on Thursday, the S&P 500 is down 5.4% since Monday.

So what should investors do right now?

Investors should never make investment decisions based on short-term market moves but should always follow a plan. Having said that, for long-term investors, there might be an opportunity to buy good names that have dipped below our fair value estimates after the market drop, especially if nothing has fundamentally changed for the stock since before the sell off.

A few weeks ago, we talked about 10 cheap Canadian stocks, a majority of which were gold producers. Because of the sell off, close to 50 Canadian stocks are now trading at a discount to our fair value estimates. Here are 10 more that recently dipped below our fair value estimates.

Name Ticker Industry M* Rating Moat
TransCanada Corp. TRP Oil & Gas Midstream **** Narrow
SNC-Lavalin Group Inc. SNC Engineering & Construction **** None
AGF Management Ltd AGF.B Asset Management **** None
George Weston Ltd WN Grocery Stores **** None
Air Canada Class B AC Airlines **** None
IGM Financial Inc IGM Asset Management **** Narrow
Power Corporation of Canada POW Insurance - Life **** None
BCE Inc BCE Telecom Services **** Narrow
Power Financial Corp PWF Insurance - Life *** None
Emera Inc EMA Utilities - Diversified **** Narrow
Data as of Oct. 11, 2018. Source: Morningstar

Nine of these stocks have an overall Morningstar rating of four stars. A stock is awarded stars based on its current price, Morningstar's estimate of its fair value, and the fair value’s uncertainty rating. Four of these stocks have a Narrow economic moat.

Two of these stocks recently had our analysts change their fair value estimates -- one was revised upward, while the other was lowered.

TransCanada Corp
Earlier this month, TransCanada announced that it will proceed with the construction of the 620-km Coastal GasLink pipeline project, which will have an initial capacity to transfer approximately 2.1 billion cubic square feet of natural gas per day, with a potential to expand up to approximately 5 billion cubic square feet. The pipeline will transport the natural gas from the Montney gas-producing region near Dawson Creek, BC, to the LNG Canada facility in Kitimat. The LNG Canada project will export liquefied natural gas from the west coast of Canada to Asian markets.

"We think this is a good move for TransCanada as it positions the company to add to its impressive growth portfolio with a fully secured pipeline that positions the company to take advantage of increasing Asian LNG demand. Accordingly, we are raising our fair value estimate to $72," said Morningstar senior equity analyst Joe Gemino in an analyst note.

SNC-Lavalin Group
Earlier this week, Morningstar Sector Director Keith Schoonmaker lowered his fair value estimate for SNC-Lavalin to $51 after the company announced that Canadian prosecutors declined to negotiate a remediation agreement for certain legal charges. In 2015, charges of bribery and corruption were laid against former SNC employees. The charges relate to Libyan projects.

"As we do not expect the fine to exceed $200 million, the impact of potential fines on our fair value estimate is only $1 per share. The real risk is potential disbarment and damage to the company’s reputation if SNC were to be found guilty, which could impair its growth potential," Schoonmaker said in the analyst note.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
AGF Management Ltd Shs -B- Non-Voting8.19 CAD-0.97Rating
Air Canada Shs Voting and Variable Voting16.43 CAD-1.32Rating
BCE Inc45.34 CAD-0.02Rating
Emera Inc47.93 CAD0.69Rating
George Weston Ltd213.07 CAD0.63Rating
IGM Financial Inc38.62 CAD0.29Rating
Loblaw Companies Ltd169.82 CAD0.56Rating
Magna International Inc60.34 CAD-1.49Rating
Power Corporation of Canada Shs Subord.Voting39.14 CAD0.28Rating
Saputo Inc31.49 CAD0.38Rating
SNC-Lavalin Group Inc57.46 CAD0.28Rating
TC Energy Corp57.06 CAD-0.42Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.


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