Most investors are fascinated with stories of people like Michal Burry, the man who predicted the housing market collapse of 2008 and made US $800 million by shorting the housing market.
It’s a powerful example of how a unique perspective, an acute perception, and ingenious investment techniques can help you beat the market. But this is a hard-to-replicate feat with a high probability.
Most retail investors are more likely to succeed by following time-tested strategies like value investing.
If held for long enough, this list of the best value stocks in Canada is an excellent place to start.
Economic Factors Influencing Value Stocks
One primary factor is interest rates. These rates, set by central banks, can greatly impact a company’s borrowing costs. In an environment where interest rates are on the rise, companies with substantial debt on their books may see a dip in their stock value due to anticipated higher borrowing costs in the future.
This potential dip can present opportunities for value investors to find stocks trading below their intrinsic value.
Another key factor is inflation. Inflationary pressures and how they impact various sectors can create disparities in stock valuations. Some companies, especially those with less pricing power, might struggle to pass on increased costs to their consumers.
This inability can lead to decreased profit margins and a decrease in stock valuations. For a value investor, identifying sectors most impacted by inflation can lead to potential investment opportunities.
Lastly, Gross Domestic Product (GDP) growth, a broad measure of an economy’s health, can influence stock valuations. In booming economies, growth stocks typically outperform.
However, during slower GDP growth or economic contractions, investors often seek the safety of established, undervalued companies, providing a favourable environment for value stocks.
Best Value Stocks In Canada
- Suncor (SU.TO)
- Molson Coors Canada (TPX-B.TO)
- Canadian Apartment Properties REIT (CAR-UN.TO)
- Air Canada (AC.TO)
- Shopify (SHOP.TO)
- FirstService (FSV.TO)
- Bausch Health Companies (BHC.TO)
- Lightspeed Commerce (LSPD.TO)
- Canfor (CFP.TO)
- NFI Group (NFI.TO)
- Aurora Cannabis (ACB.TO)
1. Suncor Stock
- Ticker: SU.TO
- Industry Niche: Integrated energy company
- Forward Dividend Yield: 4.38%
- Dividend Payout Ratio: 29.37%
- Dividend Yield (12-Month Trailing): 4.65%
- Upcoming Dividend Date: Dec 22, 2023
- Market Cap: $57.82 Billion
- Forward P/E Ratio: 7.2
Suncor is a Canadian energy giant and one of Canada’s few fully-integrated energy companies. It covers the entire value chain – From extracting oil from oil sands to selling it on its own massive gas station chain (Petro-Canada), with nearly 1,600 locations.
And since it’s fully integrated, its asset base is massive and total assets have been much higher than the market cap for quite a few years now.
2. Molson Coors Canada Stock
- Ticker: TPX-B.TO
- Industry Niche: Beverages/Beer
- Forward Dividend Yield: 2.69%
- Dividend Payout Ratio: 21.14%
- Dividend Yield (12-Month Trailing): 1.11%
- Upcoming Dividend Date: Dec 15, 2023
- Market Cap: $17.97 Billion
Molson Coors, currently headquartered in Ontario, came into being thanks to a 2005 merger of US-based Coors and Canada-based Molson.
Molson has been around for more than two centuries and Coors for about one and a half-century.
Collectively, it’s the fifth-largest beer company in the world, has 15 brands and 42 breweries under its banner, and sells its beverages in over a hundred countries.
In fact, beer sales actually increase during financially and emotionally stressful events like the pandemic and the great recession.
3. Canadian Apartment Properties REIT Stock
- Ticker: CAR-UN.TO
- Industry Niche: Residential REIT
- Forward Dividend Yield: 3.08%
- Dividend Payout Ratio: 18.55%
- Dividend Yield (12-Month Trailing): 3.22%
- Upcoming Dividend Date: Dec 15, 2023
- Market Cap: $7.61 Billion
- Forward P/E Ratio: 17.77
The largest REIT in the country by market cap is also one of the largest from an asset perspective. It has a massive portfolio of 67,500 residential suites, which mainly includes apartments and townhouses, and communities.
The bulk of the portfolio is here in Canada, but a significant portion is overseas in the Netherlands. The largest segment of the portfolio is in Ontario, with the second-highest net average rent.
Not only does it offer decent capital appreciation potential, but the dividends are quite decent, healthy, and growing as well.
4. Air Canada Stock
Before the pandemic devastated the economy and sent many businesses reeling from its financial blows, Air Canada stock was a coveted investment for more than just its leadership position in the Canadian air travel industry.
It has a massive fleet of Boeing, Airbus, Mitsubishi, Embraer, and De Havilland aircraft, and even at resale value, the fleet is significantly more valuable than the current market capitalization of the company. And that’s just one facet of its tangible assets.
5. Shopify Stock
Shopify’s valuation discount is a 2022-specific event since that’s when the company started experiencing its massive decline after enjoying an unparalleled bullish phase practically since inception.
It has the number one market share in the US and Australia, number two in UK and Germany, and it’s always in competition for the top spot with WooCommerce.
6. FirstService Stock
- Ticker: FSV.TO
- Industry Niche: Property management, essential real estate services
- Forward Dividend Yield: 0.61%
- Dividend Payout Ratio: 27.30%
- Dividend Yield (12-Month Trailing): 0.41%
- Upcoming Dividend Date: Oct 06, 2023
- Market Cap: $9.54 Billion
- Forward P/E Ratio: 30.37
FirstService is a leader in the two spaces it operates. As a property manager, it has the most extensive portfolio of properties (primarily residential) in North America.
As a provider of essential real estate services, it has captured a significant portion of the market.
7. Bausch Health Companies Stock
While the healthcare sector in Canada is dominated by Cannabis, there are quite a few pharmaceutical companies as well, and the most dominant among them is Bausch.
Currently, Bausch is a mere shadow of its former self. Some scandals shot the company down from the heights it was soaring at, but it still retains a powerful market position.
Two of the underlying companies are leaders in their respective spaces, i.e., Bausch + Lomb is one of the four of the world’s largest suppliers of contact lenses, and Salix Pharmaceuticals is the world’s largest gastroenterology-focused specialty pharmaceutical company (based in the US).
And its operational facilities (and supply chain elements) make up for a massive asset base.
8. Lightspeed Commerce Stock
Another e-commerce company that’s brutally undervalued is Lightspeed. It’s suffering alongside the broader e-commerce market as a whole and from a report that specifically targeted some discrepancies in the Lightspeed claims, which alienated a lot of investors.
However, the company still has an impressive presence, and the current price doesn’t reflect its true value.
The company is served about 119,000 locations in around a hundred countries, which is a significant increase from its 2019 and 2020 numbers (49,000+ and about 76,500 locations, respectively).
9. Canfor Stock
Canfor has two business wings – lumber and pulp, and a decent number of facilities for the processing and production of the two.
Its facilities include sawmills, processing plants, pellet manufacturing facilities, pulp mills, and even a biomass green energy facility.
The company has a decent operational base and an impressive presence in the market, and thanks to its focus on lumber which is generally accepted as a more environmentally feasible construction material compared to concrete, the company is likely to see demand rise in the future (better cash flows).
10. NFI Group Stock
- Ticker: NFI.TO
- Industry Niche: Zero-Emission Buses (ZEBs)
- Forward Dividend Yield: 1.60%
- Dividend Yield (12-Month Trailing): 0%
- Upcoming Dividend Date: Oct 17, 2022
- Market Cap: $1.65 Billion
- Forward P/E Ratio: 38.58
Winnipeg-based NFI Group is one of the largest manufacturers of environmentally friendly Zero-Emission Buses (ZEBs) in North America and has the largest production capacity in North America and UK (over 8,000 units a year).
The main strength of its products is that they can be fitted for different fuel sources, ranging from clean diesel to electric fuel cells.
It also has the number one market share in five different segments, including North American heavy-duty transit and UK aftermarket parts. This is a major early bird advantage.
11. Aurora Cannabis Stock
Aurora Cannabis is one of the many fallen marijuana giants in Canada, and this one perhaps fell the hardest.
But even though it lost a lot of investor confidence and market capitalization, its asset base is still quite solid. It has three production facilities in Canada and one in Europe.
And two out of four facilities are EU GMP certified. The total production capacity is roughly 74,500 kilograms per year.
It also has three separate research facilities. It has dominance in the medical marijuana sector in Canada, and thanks to the brands it has consolidated under its banner, the recreational portfolio is growing at a powerful pace as well.
Value Investing – What Do You Need To Know?
In its simplest form, the definition of a value stock is “a stock that’s trading for less than its intrinsic value.” This term and the definition have been around since 1949 and were introduced by Benjamin Graham – the father of value investing.
But when you start choosing value stocks, you will realize it’s not quite simple. Different investors have different interpretations of a company’s intrinsic value since that’s what the valuation discount is calculated upon.
Warren Buffett’s value investing strategy focuses on cash value projections, and other traits he focuses on are known entities, modest/under diversification of portfolio, etc.
It takes time to build up a decent investment acumen. Also, unlike seasoned investors like Warren Buffett, that are in the business of making money through investment, most retail investors can’t dedicate enough time and energy to developing an eye for the perfect value stocks.
So an easy way to streamline the process of choosing value stocks is to stick with the most commonly used metrics. And the two most important ones are:
Price-To-Earnings (P/E) Ratio: This is the most commonly used metric for value investing. It compares the stock price to the company’s earnings.
A low P/E ratio shows a positive discrepancy between what the investors are willing to pay for a stake in the company (the price) and its earnings/financial potential.
Similarly, a high value indicates companies that are overvalued. This ratio is only applicable when comparing stocks from the same industry.
For example, in Canada, a banking stock with a P/E ratio of 20 might be relatively overvalued, but a tech stock would be considered significantly undervalued. It also changes from time to time.
Price-To-Book (P/B) Ratio: This ratio connects a company’s share price to its book value (assets) and leans more towards tangibility.
Unlike P/E, there is a relatively generalized threshold for the P/B ratio, and stocks with ratios lower than 1.5 are generally compared as undervalued.
It’s important to note that while discounted stocks are often undervalued as well (since the price falls, pushing down the value of P/E and P/B ratios), it is not always the case, so it’s prudent to check the valuation metrics even when you encounter a significant price discount.
The Future of Value Investing
The digital age presents both challenges and opportunities. Algorithm-based trading and sophisticated analytics tools can now identify potential value stocks in real-time, far quicker than human analysis.
This tech-driven approach, while promising, needs to be tempered with thorough fundamental analysis to ensure long-term investment success.
Furthermore, the world is seeing a marked shift towards responsible investing. Environmental, Social, and Governance (ESG) criteria are becoming essential considerations for many investors.
Companies with robust ESG practices are perceived as better prepared to handle future societal challenges, regulatory shifts, and potential litigation. For value investors, this adds another layer of analysis.
Identifying companies that not only trade below their intrinsic value but also score high on ESG parameters could offer the best of both worlds: value and future resilience.
How To Buy Value Stocks In Canada
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The best value stocks in Canada are a pool that’s always changing, mostly because of price fluctuations and sometimes due to revenue/earnings spikes.
Even if you find it difficult to calculate an accurate intrinsic value for a stock, sticking to metrics like P/B and P/E might help you identify the best value stocks that you can hold long-term for decent gains.
If value investing is not a conservative enough strategy for your risk tolerance, the best defensive stocks in Canada might be more to your liking.