Value investing is one of the most popular investment strategies of all time. Value investing addresses inefficiencies in the stock market. It allows investors to buy stocks at a discount to their "intrinsic value," which is related to the future cash flow the investment is expected to produce.
We're not going to get into the intricacies of discounted cash flow analysis. In this article, we will identify some of the most promising Canadian value stocks available today.
What criteria must be met to make it on this list of top Canadian value stocks?
Value is entirely subjective. Depending on your future outlook of a company, you may have a completely different price target than an analyst or friend.
But for this list of Canadian value stocks, we'll have some criteria we follow. They'll need to trade at an attractive price-to-earnings or price-to-free cash flow ratio, often below historical valuations and the industry average.
They will also need to be growing revenue and earnings. Many stocks will be looked at as value options because of a decline in stock price. However, an earnings decline or a material shift in the overall business could be the reason for the decline in share price.
On this list, we want Canadian stocks trading at strong valuations relative to their future growth, a longer outlook than other more short-term strategies such as day trading stocks.
With that said, let's get started.
Keep in mind these stocks are in no particular order.
What are the best value stocks in Canada right now?
- Manulife Financial (TSE:MFC)
- Canadian Natural Resources (TSE:CNQ)
- BRP Inc (TSE:DOO)
- Tourmaline Oil (TSE:TOU)
- Gildan Activewear (TSE:GIL)
- BCE (TSE:BCE)
- Parkland Fuels (TSE:PKI)
- Canadian Tire (TSE:CTC.A)
Manulife Financial (TSE:MFC)
Since Manulife Financial slashed its dividend during the financial crisis, this stock has been stuck in value mode. The company is one of the country's largest life insurance and wealth management companies, with a market cap of over $40B.
The primary driver for its growth has been its Asia segment, which continually expands and offers new services. However, the pandemic and lockdown-related issues have impacted that region.
You'd be hard-pressed to find a cheaper large-cap stock on the TSX Index. At the time of writing, Manulife is trading at only 6 times its trailing earnings and is trading below book value.
It has all of the components of a value stock baked into it. It seems to be the sentiment from a past dividend cut that has this one in long-term value mode. It will be interesting to see if it can break out.
Canadian Natural Resources (TSE:CNQ)
Despite a meteoric rise in price post-pandemic, Canadian Natural Resources still comes up in most screeners while searching for value stocks. This is likely because the company is a cash flow machine. With a breakeven price in the $30 per barrel range, it can push out profits in almost any economic situation.
Because of the considerable rise in oil prices in 2021 and 2022, most analysts expect a downgrade in Canadian Natural earnings moving forward.
However, despite the anticipated decline in earnings, the company is still trading at attractive valuations. It is undoubtedly one of the top value stocks here in Canada.
The company has generated over $14B in cash flow annually and has a market cap of under $90B. If Canadian Natural were in virtually any other industry besides oil and gas, it would be trading at a significantly higher multiple in relation to its free cash flow.
But because of the continued bearish sentiment in the oil and gas sector, it trades at a discount compared to the company's quality.
BRP Inc (TSE:DOO)
BRP Inc, or Bombardier as most consumers would recognize it, is one of the largest recreational vehicle producers in the world. It has a dominant market share not only in North America but globally.
Have you ever heard of brands like Can-Am, Seadoo, and Skidoo? You likely have, which makes BRP a strong option in the recreational vehicle market. The company was a spin-off from Bombardier Inc in 2003.
The company's recreational vehicle department was sold off in a move that would end up being strong, as BRP Inc has been an outstanding performer for decades.
The recreational vehicle craze was expected to die off in a higher interest rate and post-pandemic environment. As such, many investors have been selling off Bombardier in anticipation of falling earnings.
However, the company has performed exceptionally well outside a pandemic/lockdown-type environment. It is showing no signs of slowing down.
As a result, it is trading at a high single-digit price-to-earnings ratio despite growing those earnings at a double-digit clip.
Tourmaline Oil (TSE:TOU)
Despite oil being in Tourmaline's name, it produces little oil. This company is one of the largest natural gas producers in North America.
With natural gas expected to remain high, earnings expectations for Tourmaline are also likely to be strong. The company is expected to post earnings per share of nearly $12 per share in 2023 and 2024.
At the time of writing, this puts the company at a mid-single-digit forward price-to-earnings ratio and a low double-digit price-to-free cash flow ratio.
Considering the company is virtually debt free, with long-term debt of $450M on revenue of nearly $8B, it should be in a strong position to continue raising the dividend and possibly even giving out special dividends to shareholders.
Obviously, with commodities, the overall trajectory of these companies can vary wildly because of fluctuating earnings. However, a lot of it seems to be priced in already.
Tourmaline should be able to generate a significant amount of free cash flow for investors over the next few years, and long-term holders should be rewarded.
Gildan Activewear (TSE:GIL)
Gildan is a vertically integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery.
Gildan is primarily a producer and distributor of athletic-based apparel, and the COVID-19 pandemic hit the company exceptionally hard. Revenue fell from $3.7B in 2019 to just $2.6B in 2020.
It has since rebounded in revenue, but since a dividend suspension in 2020, investor sentiment has yet to return.
Even though I don't blame the company for the dividend suspension due to the circumstances, the market tends to punish companies that cannot maintain the dividend regardless.
Because of this, it seems to be trading at relatively attractive valuations. With a high single-digit price-to-earnings ratio and mid-2% dividend yield at the time of writing, if you're looking for exposure to a reliable retailer here in Canada, Gildan is undoubtedly a value option.
BCE Inc (TSE:BCE)
Rising interest rates are generally not suitable for companies with heavy debt burdens. As a result, BCE Inc, or Bell Communications as most know it, has taken a hit in price.
BCE is a wireless and internet service provider offering wireless, broadband, television, and landline phone services in Canada. It is one of the big three national wireless carriers, with roughly 10 million customers constituting about 30% of the market.
The market share of the Big 3 (Telus, Rogers, Bell) telecom companies in Canada makes them strong options, especially for those looking for a strong income stream.
But as mentioned, with higher rates come lower stock prices. Interest expenses can erode earnings, and investors with a short-term mentality might sell them.
But for those looking to buy and hold for the long term, the current price, due to negative sentiment, is undoubtedly attractive. BCE is trading at a single-digit discount to its historical price-to-earnings ratios. Despite rising rates, it is still expected to push out low single-digit earnings growth annually over the next few years.
That, and the fact the company is yielding nearly 6% at the time of writing, make it an attractive proposition for value investors.
Parkland Fuels (TSE:PKI)
Parkland Fuels was one of the best-performing stocks on the Toronto Stock Exchange before the COVID-19 pandemic and rising interest rates. The company does have some issues concerning debt levels, but nothing it hasn't navigated before. The selloff due to some short-term underperformance and leverage ratios is undoubtedly making it attractive from a value standpoint.
Parkland Corp distributes and markets fuels and lubricants. Refined fuels and other petroleum products are among the
variety of offerings the company delivers to motorists, businesses, consumers, and wholesalers in the United States and Canada.
The company utilized leverage to fuel some strong acquisitions in the pre-pandemic low rate environment. However, the market has now soured on companies in poor debt situations. This has left Parkland trading at a near 50% discount to its historical averages and a high single-digit price-to-earnings ratio. This one does have a bit of risk built in, especially considering the company's leverage ratio is 3.5x heading into a high rate environment and possible recession.
However, suppose it continues to put up strong results as it has been. In that case, market sentiment can quickly shift when rates start to go down, and this one should be able to outperform.
Canadian Tire (TSE:CTC.A)
When recessions are expected, retailers tend to get hit the most, especially those with high debt levels. Canadian Tire fits this mould, but I'm not worried about its sales or supply chain during a recessionary environment or even its debt levels at this time.
The company is a staple to most Canadians regarding tools and household items. With its acquisitions of companies like Sport Chek and Helly Hanson, it owns some of the strongest brands in the country.
It has historically done an excellent job at getting people inside of their brick and mortar stores.
During the pandemic, it accelerated the growth of its e-commerce segment significantly, which should accelerate earnings growth even more in the future.
Flat earnings are projected into 2023 and even 2024. However, considering at the time of writing, the company is only trading at 8.5 times those expected earnings, it seems like the recession is already priced into Canadian Tire for the most part.
Not to mention, the company's dividend yield is now approaching 5% due to the selloff in price. The company is a Canadian Dividend Aristocrat, having raised the dividend for 11 straight years.
Overall, these are some of the best Canadian stocks when it comes to value
There have recently been many more value stocks on the TSX composite index, mainly due to economic circumstances. However, these are certainly some of the best.
They have attractive price-to-earnings ratios and solid fundamentals. They are certainly stocks you can add to your watchlist to develop a diversified portfolio of strong companies.
There is a nice mix on this list as well. Although there may be multiple attractive opportunities on the TSX today, I decided to switch it up and include financials, oil and gas, retailers, and more.