10 Undervalued Canadian Stocks

These local favourites are on sale

Andrew Willis 11 March, 2021 | 4:38AM
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With the exceptionally choppy markets we’ve had lately, some great Canadian names have fallen below fair values – some even have economic moats, generous dividends and strong sector growth.

The list of stocks on sale is dominated by an underappreciated energy sector that’s remained undervalued despite fast-rising crude oil prices.

At the top of the list is a Canadian classic in the fast-growing cannabis space, Aurora Cannabis (ACB). Its extreme fair value uncertainty may not come as a surprise to longtime investors after the company faced multi-billion dollar goodwill impairment charges and a reverse stock split last year. Despite this, investors gave the company another push. “Following a December public offering and January bought deal of shares and warrants, we think Aurora has enough cash to reduce its need to tap the capital markets. However, Aurora is not yet out of the woods,” says sector director Kristoffer Inton.

Stocks like Aurora may be the ‘cheapest’ but compared to other companies with better value certainty and economic moats, they might not bring the best risk-adjusted returns:

 Name Price / Fair Value Fair Value Uncertainty Moat
Aurora Cannabis Inc (ACB 0.45  Extreme  None 
Enbridge Inc (ENB 0.75  Medium  Wide 
Cenovus Energy Inc (CVE 0.78  Very High  None 
SNC Lavalin Group Inc (SNC 0.80  Very High  None 
George Weston Ltd (WN 0.81 Medium None
TC Energy Corp (TRP 0.82 Medium Narrow
Kinross Gold Corp (K 0.82 Very High None
Suncor Energy Inc (SU 0.83 High None
Shaw Communications Inc Class B (SJR.B 0.83 High Narrow
BCE Inc (BCE 0.85 High Narrow

Source: Morningstar, as of March 2, 2021

Eye on Energy
A handful of stocks that are also still a bit sore from 2020 are the big Canadian energy names, but we’re more certain they’re undervalued. We’ve either maintained or raised the fair value estimate for companies we cover, while the market remains concerned about issues around pipelines, transportation and operating costs.

“We do not expect the market's concerns will be fully addressed for some time, which can lead to volatile swings in the stock,” says senior equity analyst Joe Gemino on our most undervalued energy stock, Enbridge (ENB): “We advise investors to stay the course while getting paid a handsome 7.6% dividend. In the end, we believe Enbridge's long and winding road will lead to 30% upside.”

While oil sands operator Cenovus (CVE) may encounter an even ‘windier’ road ahead, our long-term thesis remains intact. Rising oil prices offset our concerns from a recent earnings disappointment, which we think the market overreacted to. “We think the market is overlooking the company’s cash flow potential from its top-tier oil sands assets,” says Gemino.

It’s hard for the market to overlook limited pipeline growth with increasing environmental regulations - something that TC Energy (TRP) contends with. But investors shouldn’t miss how the company’s making the best of its current situation, with “increased performance driven by lowering operating costs on the company’s U.S. natural gas pipelines and higher rate-based earnings on the company’s Canadian gas pipelines,” notes Gemino.

And in the case of integrated names like Suncor (SU), the market may need to be more patient as various business segments are still playing catch up. “In our view, the market is too narrowly focused on the temporary decline in demand for refined products along with the issues plaguing the other upstream companies. We expect refinery demand to pick up when crude oil demand increases,” says Gemino.

Non-Energy Ideas
While we believe oil and gas assets are underappreciated with major energy players, we saw them as a potential liability when paired with non-energy sector businesses. We are raising our fair value estimate for SNC Lavalin (SNC) to $33.50 from $31 after the engineering and construction firm announced that it has agreed to sell its oil and gas business. “We see the move as a significant step in derisking SNC-Lavalin’s portfolio,” notes equity analyst Krzysztof Smalec, as he expects the divestment to lower the firm’s cyclicality. 

Investors looking to avoid cyclicality might consider consumer staple giant, George Weston (WN). Off the heels of recent earnings from Loblaw’s that were largely within expectations, equity analyst Nicholas Johnson took some time to appreciate the firm’s dependability. “As the coronavirus pandemic continues to linger, we believe the results remained true to the firm’s hallmark consistency, a function of good execution and its defensively-oriented portfolio of businesses.”

Our only three-star rated stock on the list, Kinross Gold Corp (K), saw shares decline in line with gold prices, but sector Kristoffer Inton thinks that overshadows business improvements within the company. “We think the market is underestimating some of Kinross’ development projects that should grow production and reduce costs.”

The last two undervalued stocks are classic Canadian picks because they’re in a highly regulated space, expensive and among only a few service providers to choose from. Equity analyst Matthew Dolgin is pleased with the growth he’s seen at Shaw Communications (SJR.B) as it more than doubled its postpaid wireless (Freedom Mobile) subscriber base since taking over in 2016. “We think the firm is a legitimate competitor for new wireless customers and will continue seeing wireless results trend upwards,” says Dolgin.

BCE Inc (BCE) (Bell Canada) might not be happy about losing wireless customers to Freedom Mobile, but most of its revenue (54%) still comes from wide-reaching wireline (internet) offerings anyways, notes Dolgin. “We believe BCE's wireline scale gives it significant cost advantages over its smaller rivals, as it can spread overhead, marketing, and other fixed costs over a much larger subscriber base.”

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About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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