Are you looking for undervalued stocks that are poised for big returns?
If so, I have good news and bad news for you.
The bad news is that such stocks are hard to find these days. The markets have risen so much at the moment that the indexes are not cheap at all.
The good news is that isolated areas of value still exist. If you look in categories like small caps and energy, you can find real value. In this article, I share three undervalued Canadian stocks that could be poised for big returns.
EQB
EQB Inc (TSX:EQB) is a small Canadian bank with no branches. It’s one of the rare stocks to see its price fall this year, thanks in large part to earnings falling in recent months. The company raises money by selling guaranteed investment certificates (GICs), and makes money by lending money to Canadian borrowers (businesses, homeowners, etc.). The problem here is that the gap between short-term and long-term loan rates isn’t very wide at the moment, which has hurt EQB’s margins. The bank is also reporting rising loan loss provisions (PCLs).
Both problems are temporary. The Canadian yield curve is likely to steepen in the future, and EQB’s rising PCLs are just there to protect against potential losses. They reflect sensible risk management and not declining economic income.
Due to the perceived problems the company is facing, EQB shares are quite cheap, trading at 9.5 times earnings. I think this is a reasonable price to pay for the stock, especially in this overheated market.
Suncor Energy
Suncor Energy Inc (TSX:SU) is a Canadian energy stock that has fallen due to perceived weakness in its most recent earnings results. In the most recent quarter, Suncor’s sales and all profits fell. This was due to low oil prices in the just reported quarter.
Will Suncor turn things around? This seems likely as oil demand continues to rise while OPEC keeps supply at moderate levels (production increases this year, but these are quite small). For this reason, I think Suncor has decent value at 11.5 times earnings.
easy
easy (TSX:GSY) is a Canadian lender that also operates in the retail industry. If you’ve ever seen those “EasyHome” stores in malls, goeasy is the parent company that owns them.
What goeasy does is twofold:
- It offers people financing for mid-sized purchases (furniture, electronics, appliances, etc.).
- It also sells the same types of items for which it provides financing.
The lease-to-own model offers EasyHome two sources of income (financing and product sales), while EasyFinancial makes money exclusively through loans.
It’s a model that has worked well for goeasy, which has grown its revenues at a CAGR of 26% over the past five years, and had a profit margin of 35% in the trailing twelve-month period (TTM). Despite all this growth, GSY shares are quite cheap: they trade at 9.9 times earnings, 1.5 times sales and 2.1 times book value. I think GSY is probably undervalued and a good buy today.
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