The Canadian equity markets had made a bright start to this year, with the benchmark index rising 6.1% by the end of January. However, robust economic data in the United States have raised the fear that the Federal Reserve could continue its monetary tightening initiatives. These fears have dragged the equity markets down, with the S&P/TSX Composite Index trading 2.8% lower than this year’s high.
The broader weakness has also dragged some quality stocks down, thus creating buying opportunities. Among them, I believe the following three stocks are undervalued, given their solid underlying businesses and cheaper valuation.
Suncor Energy
In an interview with Bloomberg Television yesterday, Russell Hardy, CEO of Vitol Group, stated that oil prices could bounce back to US$90/barrel – US$100/barrel in the second half of this year amid rising oil demand and supply concerns. His comments further echoed analysts’ expectations of oil prices moving towards US$100/barrel by the end of this year. So, rising oil prices could benefit oil-producing companies, such as Suncor Energy (TSX:SU).
Given its long-life, low-decline asset base, the company expects to break even at WTI (West Texas Intermediate) crude trading at US$35/barrel. As oil prices are currently above that mark and could rise further, Suncor Energy is well-equipped to benefit from higher oil prices. Besides the company’s continued capital investments, optimization initiatives and a substantial decline in debt levels could support its financials in the coming quarters.
Despite its healthy growth prospects, Suncor Energy trades at a cheaper valuation, with its NTM (next 12 months) price-to-sales and NTM price-to-earnings multiples at 1.3 and 7.1, respectively. Also, its dividend yield for the next 12 months stands at 4.45%. Considering all these factors, I expect Suncor Energy to outperform this year.
Telus
Second on my list would be Telus (TSX:T), which is trading 21.5% lower than its 52-week highs. The steep interest rate hikes appear to have made investors nervous about the capital-intensive telecommunication sector, thus leading to a pullback in the company’s stock price. Amid the sell-off, the company trades at an NTM price-to-sales multiple of 1.9, which looks cheap for a company in a growth sector.
Telecommunication services have become an essential part of our day-to-day life, thus driving demand for Telus services. Amid the growing demand, Telus continues to make capital investments to expand its 5G and PureFibre network and accelerate the copper-to-fibre migration. Besides, the acquisition of LifeWorks has strengthened its position in the telehealthcare sector, which could grow at a CAGR (compounded annual growth rate) of 19.5% for the rest of this decade.
Telus pays quarterly dividends, while its yield currently stands at a healthy 5.17%, thus making it an enticing buy.
TransAlta Renewables
TransAlta Renewables (TSX:RNW) operates or has an economic interest in 48 power-producing facilities across three countries, with a total power-generating capacity of 3 gigawatts. It sells substantial power generated from its facilities through long-term PPAs (power purchase agreements), stabilizing its financials. Supported by these stable financials, the company has delivered annual shareholder returns of around 10.5% since going public in 2013.
Meanwhile, management expects to put its Kent Hills facility into service in the second half of this year. Additionally, TransAlta Renewables is constructing several projects, which it intends to put into service this year. Given these growth initiatives, the company expects to post an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $495–$535 million this year, with the midpoint representing a 5.7% year-over-year growth. It also pays a monthly dividend, with its yield currently at 8.26%.
However, amid the increasing interest rates and weakness in the renewables sector, TransAlta Renewables has lost around 41.5% of its stock value compared to its April highs. The company’s NTM price-to-earnings has also declined to 13.8, making it an attractive buy.
