10 Cheap Moaty Canadian Stocks

These companies all have an edge and come at a discount - and two of them can fend off rivals for decades to come

Ruth Saldanha 7 January, 2021 | 4:28AM
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Canadian potash train in Alberta mountainrangeAs we begin a new year, there is palpable relief that the old year is over! For investors, the main question is where should you invest in 2021? The answer is always, “It depends”. Where you invest depends on (among other things) your financial goals, your time horizon, and your risk tolerance.

If however, you want to invest in stocks, you have a few options. As of December 21st, 45 stocks were trading below our fair value estimates (FVEs). The cheapest of these are in Cannabis. However, none of them have an ‘economic moat’. A company with an economic moat can fend off competition and earn high returns on capital for many years to come. The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company whose competitive advantages we expect to last more than 20 years has a wide moat; one that can fend off their rivals for 10 years has a narrow moat; while a firm with either no advantage or one that we think will quickly dissipate has no moat.

Today, we decided to look at 10 Canadian stocks that are trading below our fair value estimates, and also have an economic moat. Of the 10, three are telecom companies, three are financial services firms (including banks) and two are in oil and gas and three are oil and gas companies. Two of them have a ‘Wide’ economic moat, while the rest are narrow. Here’s the list:

 Name Ticker FVE Economic Moat Moat Trend
 Enbridge Inc ENB 0.74 Wide Stable
 Nutrien Ltd NTR 0.78 Narrow Stable
 TC Energy Corp TRP 0.81 Narrow Stable
 CI Financial Corp CIX 0.82 Narrow Negative
 Shaw Communications Inc Class B SJR.B 0.84 Narrow Negative
 BCE Inc BCE 0.85 Narrow Stable
 Cameco Corp CCO 0.86 Narrow Positive
 Telus Corp T 0.88 Narrow Stable
 The Toronto-Dominion Bank TD  0.91  Wide  Stable 
 National Bank of Canada NA  0.92  Narrow  Stable 

Morningstar Direct Data as of Dec. 21, 2020

The telecom companies are a new addition from last quarter’s list of moat-y stocks. Morningstar analyst Matthew Dolgin points out that the businesses of the three major telecom players in Canada have been hurt quite a bit by the pandemic, especially their wireless businesses, which faced a tough time “These actually have caused major headwinds to the wireless revenue and that's been especially hurtful to Rogers, BCE also had, it was probably the next most hurt, and Telus (T) a little bit less so. But essentially each of their wireless businesses really did get affected quite a bit by the pandemic, and it's not certain how quickly they'll come back. We might be looking at a couple of years until we get back to 2019 revenue,” he points out.

In terms of moats, Dolgin notes that the two sources of the moat are efficient scale and cost advantages. “For telecom companies, you're talking about a wireline or wireless network, there are really high costs to build those, so these firms that have these networks already have significant advantages over those that might want to come in and compete. We see these incumbents as having significant advantages over more upstart type of competitors, and we think they're protected for that reason,” he says.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
BCE Inc45.18 CAD-3.19Rating
Cameco Corp71.29 CAD-1.95
CI Financial Corp14.32 CAD0.85Rating
Enbridge Inc48.25 CAD-0.70Rating
National Bank of Canada106.43 CAD-1.24Rating
Nutrien Ltd70.32 CAD-0.16Rating
TC Energy Corp53.25 CAD-0.50Rating
TELUS Corp21.72 CAD-0.14Rating
The Toronto-Dominion Bank74.53 CAD-0.04Rating

About Author

Ruth Saldanha

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


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