If you’re patient, these value stocks have big upsides
The pandemic stock market has been characterized by panic buying and selling. The most recent phase of the current bull market, one of the longest in history, has been among the toughest for making decisions about sound, longterm investments.
That said, there is certainty about two of the most powerful tailwinds supporting stock prices and driving them higher.
Through successive waves of the pandemic this year, economists have consistently forecast a dynamic recovery for the Canadian economy.
And that above-average growth in GDP — in the sixper-cent range this year, about triple the normal rate — will be accompanied by continued low interest rates.
Sustained low interest rates on fixed-income investments drive investors into equities in search of higher returns.
The Bank of Canada’s decision this week to keep its key lending rate at a rock-bottom 0.25 per cent reflects the intent of central bankers worldwide to keep rates low rather than risk short-circuiting economic recovery.
They’re sticking to that policy despite a resurgence of inflation they expect will have subsided by next year.
This column highlights stocks of companies with considerable upside potential in sales, profits and stock valuations. And in a nod to those low interest rates, most also pay above-average dividends that provide competitive yields.
Some readers will be surprised to see turnaround plays Air Canada and Suncor Energy Inc. in this report on value stocks. But they each are among the best-run companies in their industries and merit the attention of value investors with patience and risk tolerance.
á Toronto-Dominion Bank: Shares in the Big Six bank would appear to be undervalued, trading at seven per cent below their $82 high. TD booked a record profit of $11.9 billion in the pandemic year 2020, consistent with ever increasing profits over the previous five years.
Banking investors are skittish about campaign promises in the current election to impose a surtax on bank profits. They shouldn’t be. The proposed taxes would nick Big Six profits by an average of just two per cent, as calculated by analyst Gabriel Dechaine of National Bank Financial Inc.
Upside growth for TD comes from a reopening economy and a return to higher levels of business investment, which has lagged an upturn in consumer spending.
Meanwhile, TD stock boasts an above-average yield of 3.8 per cent. And the shares are the least expensive of the Big Six banks, trading at a priceearnings multiple of just 9.8, compared with an average of 11.6 for TD’s peers.
á Restaurant Brands International Inc. (RBI): RBI is one of the world’s biggest operators of quick-service restaurants, with three chains: Tim Hortons, Burger King and Popeyes. Despite pandemic restrictions, RBI earned an impressive $652-million profit in 2020. And all three RBI brands have posted doubledigit increases in sales and pre-tax profits in this year’s first half.
Future revenue growth comes from an enriched customer rewards program at Burger King rolling out now, and a planned expansion of Tim Hortons in China to as many as 2,750 stores in five years, up from about 200 today.
RBI stock boasts an industryleading yield of 3.3 per cent. And, in a move calculated to support the firm’s share price, RBI recently committed to spending as much as $1.2 billion on share buybacks over the next two years. á Suncor Energy Inc.: At a current price of about $25, shares of Canada’s largest integrated petroleum company trade at less than half their peak value in 2018. Analysts pin their expectations of a substantial recovery in the share price to an expected 70-per-cent increase in the average 2021 oil price over 2020, and an average price in the $55-per-barrel range (Canadian) until 2040.
Suncor is trying to address a significant drag on oil-stock prices — the exodus from the sector by ecoconscious investors.
It is altering its product mix to include more clean-energy production, including electricity and hydrogen.
And Suncor this year allied with producers that collectively account for about 90 per cent of Canadian oilsands production to achieve net-zero greenhouse gas emissions by 2050. Some large Canadian pension funds have responded by roughly doubling their investment in oilpatch firms, to about $2.4 billion.
After cutting its dividend last year, Suncor’s return to profitability has enabled it to increase total shareholder returns to approximately $1.0 billion in the quarter ended June 30. The firm has an aggressive share buyback plan. And Suncor stock boasts a handsome yield of 3.5 per cent. á Leon’s Furniture Ltd.: At a current $22, shares in Canada’s largest home-furnishings retailer are trading at about 10 per below their peak price. After a remarkable 52 per cent surge in revenues in 2020, due to the pandemic home-renovation boom, investors might wonder where future growth will come from.
The answer is continued store openings at Leon’s namesake chain and its Brick brand, and resolution of supply-chain and tariff growth constraints that are likely temporary.
Sourcing most of its goods offshore, largely from China and Vietnam, Leon’s is a victim of the current supply-chain bottlenecks caused by a rapid reopening of the global economy.
And Leon’s and other Canadian furniture retailers are seeking relief from new federal tariffs imposed on upholstered-furniture imports from countries accused by local producers of dumping their products in Canada below cost.
Leon’s is also restructuring its business according to the new retailing model of robust ecommerce capability combined with a traditional bricksand-mortar store network. Customers who first take an interest in a dining set or mattress at the company’s online stores want to check out these big-ticket items at physical stores.
Leon’s stock is reasonably priced, trading at a price-earnings multiple of 9.6. And it boasts an attractive yield of 2.8 per cent. á Air Canada: Currently trading in the $24 range, Air Canada shares are valued at less than half their peak price in 2019. It’s expected that AC and its industry won’t return to peak 2019 passenger-traffic levels until at least 2024.
But the industry will recover. The International Air Transport Association (IATA) points out that full recovery from the Great Recession of 2009-2011, the worst financial downturn in the modern history of commercial aviation prior to the pandemic, took about 18 months.
Last month, the Parliamentary Budget Officer said Ottawa could reap a $177-million profit over the next decade from its $5.9-billion AC financing package in April.
Investors could also do well with AC. Even if AC shares take four years to recover to their peak price, the average annual rate of return for investors during that period would be about 25 per cent.
It would be a long bumpy flight, suitable only to patient and risk-tolerant investors.
But the chance to double your money on a world-class company doesn’t come along that often.