Despite the impressive run in the broader markets (the Dow Jones Industrial Average just posted its longest winning streak since 2019) and the magnitude of multiple expansions we’ve witnessed in the technology space, there’s no shortage of value. And you don’t really need to dig into the mid-cap universe to uncover undervalued plays, either.
Undoubtedly, contrarian investors can do well by going against the grain and investing in areas that aren’t so exciting at any given moment in time. Last year, it was all about the commodities trade, as tech (especially disruptive tech) nosedived into the abyss.
This year, your average commodity play is on the retreat, while a handful of tech firms with AI prowess are surging to new heights. Indeed, it’s quite a divided market, with mega-cap tech doing the majority of the heavy lifting. The tech-heavy Nasdaq 100 became so concentrated in mega-cap tech that a so-called “special rebalance” is scheduled to happen shortly.
Value stocks can perform well, too!
On one hand, some investors are euphoric over the potential of AI to disrupt new markets. On the other hand, there’s still a slight aura of caution. Rates are still relatively high, and a recession may very well be coming to Canada at some point over the next 12-18 months.
In this piece, we’ll look at two top-performing Canadian value stocks that I think can move higher over the next two years, regardless of which sectors emerge as the next leaders. Sure, the following two value plays aren’t at all “sexy.” However, I think they offer a terrific risk/reward for investors who want to take a step back after the S&P 500’s incredible rise.
At this juncture, the TSX Index has a lot of value options that even American market participants may wish to consider.
Stella Jones
Stella Jones (TSX:SJ) is a company that’s in the not-so-exciting business of industrial wood products, most notably rail ties and utility poles. Indeed, such wood products are very necessary in all sorts of environments. Since bottoming out back in June 2022, shares of SJ have more than doubled, with 116% in gains. Undoubtedly, this goes to show that you don’t need to be in a “sexy” tech play to make a great deal of money.
Looking ahead, demand for industrial wood products (especially utility poles) is expected to remain robust for this year. Despite the stock’s incredible run, shares are still modestly valued at just 16.1 times trailing price-to-earnings, with a 1.37% dividend yield.
With a 0.7 beta, shares of SJ are less correlated to the TSX Index.
Hydro One
Hydro One (TSX:H) is another unexciting stock that’s delivered some very exciting returns lately. Shares are off around 4.4% from their all-time highs of around $40 per share. Over the past five years, shares have surged 102%. For those unfamiliar with the company, it’s an electricity transmission utility that serves the province of Ontario. The company has a sky-high moat surrounding its business, thanks in part to the regulations involved with competing on Hydro One’s turf.
Indeed, utilities are stable by nature. Hydro One takes it to another level in Ontario. Though Hydro One may not grow faster than other utilities, the degree of earnings predictability is tough to stack up against. At the end of the day, there are massive benefits to operating within a monopolistic market.
At writing, shares trade at 22.5 times trailing price-to-earnings, with a 3.13% dividend yield. The beta is also really low at 0.26, implying shares are less likely to follow the TSX Index on any given day.
