While the TSX Index trades near record levels, plenty of individual stocks are priced at a discount to their all-time highs. With interest rate cuts on the horizon and a strong job market, the economy seems to have avoided a full-blown recession, making the time ripe to go bottom fishing and identify quality undervalued stocks that trade at a cheap valuation in October 2024.
Here are two undervalued TSX stocks you can buy now to benefit from outsized gains when market sentiment improves.
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Toronto-Dominion Bank stock
Toronto-Dominion Bank (TSX:TD) is among the largest banks globally. With a market cap of $151 billion, it trades 20% below all-time highs and has underperformed the broader markets recently due to elevated interest rates and a sluggish macro environment.
Moreover, the Canadian banking giant is under investigation for anti-money laundering practices in the U.S. In fact, TD Bank set aside $2.6 billion in fiscal Q3 2024 (ended in July) for anticipated fines from the U.S. Department of Justice.
This non-recurring line item meant that TD Bank reported a GAAP (generally accepted accounting principles) net loss of $181 million compared to a net income of $2.6 billion in the year-ago period. However, its adjusted earnings in the July quarter stood at $3.6 billion or $2.05 per share.
In Q3, TD grew its sales by 8% year over year driven by higher fee income in its markets-driven business, as well as higher volumes and deposit margins in Canadian Personal and Commercial Banking. The company explained that its provisions from credit losses (PCLs) were stable compared to Q2, showcasing solid credit performance.
TD has completed its restructuring program, which was announced in Q4 of fiscal 2023, delivering efficiencies across business segments. Moreover, TD ended Q3 with a CET1 (common equity Tier 1) ratio of 12.8%. This ratio measures a bank’s ability to absorb losses and maintain solvency during economic downturns.
Priced at 10.3 times forward earnings, TD Bank stock is relatively cheap, given that adjusted earnings growth is forecast to accelerate to over 9% between fiscal 2025 and fiscal 2028. Moreover, TD Bank pays shareholders an annual dividend of $4.08 per share, translating to a forward yield of 4.7%. These payouts have risen at a compound annual growth rate of 10.5% in the last 28 years.
Whitecap Resources stock
Another undervalued TSX dividend stock is Whitecap Resources (TSX:WCP), an energy company. Valued at $6.5 billion by market cap, Whitecap Resources pays shareholders an annual dividend of $0.73 per share, which indicates a forward yield of almost 7%.
Founded more than 15 years ago, Whitecap is an oil and liquids-weighted company. Armed with an enviable light oil resource base, Whitecap has increased its funds flow at a compound annual growth rate of 13% since 2010.
In Q2 2024, Whitecap generated free funds flow of $233 million or $0.37 per share. Given its quarterly dividend, the company has a payout ratio of less than 50%, providing enough flexibility to raise dividends and lower balance sheet debt.
Last year, Whitecap increased its dividends by 26% year over year, and it aims to lower its net debt by $1 billion in 2024.
Priced at 6.5 times forward earnings, WCP stock is cheap and trades at a 15% discount to consensus price target estimates.
