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 most difficult for making sound, long-term investment decisions.
That said, there is certainty about two of the strongest tailwinds supporting stock prices and driving them higher.
Throughout successive waves of the pandemic this year, economists have consistently predicted a dynamic recovery in the Canadian economy.
And this above-average GDP growth – around 6% this year, or about three times the normal rate – will be accompanied by persistently low interest rates.
Sustained low interest rates on fixed income investments are pushing investors into equities in search of higher yields.
The Bank of Canada’s decision this week to hold its key rate at a low of 0.25% reflects the intention of central bankers around the world to keep rates low rather than risk short-circuiting the economic recovery.
They are sticking to this policy despite a resurgence in inflation which they believe will have subsided by next year.
This column highlights the stocks of companies with considerable upside potential in terms of sales, earnings and stock valuation. And in a nod to those low interest rates, most also pay above-average dividends that offer competitive yields.
Some readers will be surprised to see the recovery of Air Canada and Suncor Energy Inc. in this value stock report. But they are each among the best-managed companies in their industry and deserve the attention of value-oriented investors with patience and risk tolerance.
Toronto Dominion Bank. Big Six bank shares appear to be undervalued, trading 7% below their high of $82. TD posted record earnings of $11.9 billion in pandemic year 2020, matching steadily rising profits in the previous five years.
Bank investors are reluctant about campaign promises in the current election to impose a surtax on bank profits. They shouldn’t be. According to calculations by analyst Gabriel Dechaine of National Bank Financial Inc., the proposed taxes would reduce the profits of the Big Six by barely 2% on average.
The upside growth for TD comes from a reopening economy and a return to higher levels of business investment, which have lagged behind the recovery in consumer spending.
Meanwhile, TD stock is posting an above-average return of 3.8%. And the shares are the cheapest of the big six banks, trading at a price-earnings multiple of just 9.8, compared to an average of 11.6 for TD’s peers.
Restaurant Brands International Inc. (RBI) RBI is one of the world’s largest operators of quick service restaurants, with three chains: Tim Hortons, Burger King and Popeyes. Despite pandemic-related restrictions, RBI made an impressive profit of $652 million in 2020. And all three RBI brands posted double-digit increases in sales and pre-tax profit in the first half of this year. .
Future revenue growth comes from an enriched customer rewards program at Burger King that is being rolled out and a planned expansion of Tim Hortons in China to 2,750 stores in five years from about 200 today .
RBI shares are yielding 3.3%, the best in the industry. And, in a calculated move to support the company’s share price, RBI recently pledged to spend up to $1.2 billion on share buybacks over the next two years.
Suncor Energy Inc. At a current price of around $25, shares of Canada’s largest integrated oil company are trading at less than half of their 2018 peak. Analysts are setting their expectations for a substantial recovery in the price of the share at an expected 70% increase in the average price. oil price of 2021 compared to 2020, and an average price of around $55 per barrel (Cdn) until 2040.
Suncor is trying to address a major drag on oil stock prices – the exodus from the sector by environmentally conscious investors. It is changing its product line to include more clean energy generation, including electricity and hydrogen.
And this year, Suncor has partnered with producers who collectively account for approximately 90% of Canadian oil sands production to achieve net-zero greenhouse gas emissions by 2050. Some major Canadian pension funds have responded by roughly doubling their investment in oil companies, to around $2.4 billion. .
After cutting its dividend last year, Suncor’s return to profitability allowed it to increase total shareholder return to about $1.0 billion in the quarter ended June 30. The company has an aggressive stock buyback plan. And Suncor shares offer a nice return of 3.5%.
Leon Furniture Ltd. At a current price of $22, shares of Canada’s largest furniture retailer are trading around 10 percent lower. 100 below their peak price. After a remarkable 52% increase in revenue in 2020, due to the pandemic home improvement boom, investors might wonder where future growth will come from.
The answer is continued store openings in Leon’s eponymous chain and its Brick brand, and addressing supply chain constraints and price growth that are likely to be temporary.
Sourcing most of its goods overseas, primarily in China and Vietnam, Leon’s is a victim of current supply chain bottlenecks caused by a rapidly reopening global economy.
And Leon’s and other Canadian furniture retailers are asking for relief from new federal tariffs imposed on imports of upholstered furniture from countries accused by local producers of selling their products in Canada at a loss.
Leon’s is also restructuring its business under the new retail model of a robust e-commerce capability combined with a bricks-and-mortar store network. Customers looking for a dining set or mattress for the first time at the company’s online stores want to check out these big-ticket items in 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 percent.
Air Canada. Currently trading in the $24 range, Air Canada shares are valued at less than half their peak price in 2019. AC and its industry are not expected to return to traffic levels. peak passengers of 2019 before 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 modern commercial aviation history before the pandemic, took about 18 months.
Last month, the Parliamentary Budget Officer said Ottawa could reap a profit of $177 million over the next decade from its $5.9 billion AC funding program 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 this period would be around 25%.
It would be a long and bumpy flight, only suitable for patient and risk-tolerant investors. But the chance to double your money on a world-class company doesn’t come around that often.
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