In this piece, we will take a look at ten undervalued Canadian stocks to invest in. If you want to skip our take on the Canadian economy, then head on over to 5 Undervalued Canadian Stocks To Invest In.
Canada is one of the largest economies in the world, with estimates from the International Monetary Fund (IMF) showing that the Canadian GDP is currently worth $2.0 trillion - making it rank ninth globally. It is also a developed country and one of the few that has a mixed economy which relies on both industrial and natural resources to fuel growth and earn foreign exchange.
The mixed nature of the Canadian economy is evident when we take a look at both the most profitable Canadian companies and the largest Canadian companies in terms of market capitalization. On the former front, the top three most profitable Canadian stocks that trade on major U.S. exchanges are The Bank of Montreal (NYSE:BMO), The Royal Bank of Canada (NYSE:RY), and The Toronto-Dominion Bank (NYSE:TD). However, taking a look at the 11 most profitable Canadian companies, the picture nearly mirrors the Canadian economy as six of them are financial firms and five are natural resources companies. Switching gears to take a look at the most valuable Canadian companies, particularly those that trade on the Toronto Stock Exchange, we find out that the picture becomes more diversified to accurately represent a diversified economy. In this list, six of the most valuable firms are financial companies dominated by banks and investment managers and the second largest sector is retail with three companies. Broadly speaking, the three most valuable Canadian companies are Shopify Inc. (NYSE:SHOP), Royal Bank of Canada (TSX:RY.TO), and The Toronto-Dominion Bank (TSX: TD.TO).
Canada, like nearly every other in the world, has also been fighting the bane of high inflation. Canadian inflation however, unlike some other countries, had peaked in 2022, with the highest reading of the price increases sitting at 8.13% in June 2022 - at the same time when inflation in America had peaked at 9.06%. Since then, inflation in both countries has been on a downward trend, with the latest reading for Canada which came for June in the third week of July showing that inflation had dropped to 2.81% for a two year low.
The economies of both countries are quite interlinked as well, with Canada being America's largest trading partner as of 2021. By 2021 end, the two countries had traded $6656 billion in goods, and Canada was the U.S.'s largest export market since it had bought $307.8 billion of American goods. A large land border between the two countries facilitates trade quite a bit, and America imported products such as mineral fuels and vehicles from Canada. The U.S., at the same time, was also the largest importer of Canadian goods - a fact that underscores the key relationship between the neighboring countries and how stability between them helps both to prosper.
The strength of Canada's financial sector is also evident from the fact that North America's third largest stock exchange, the Toronto Stock Exchange, is also Canadian. Overall, the TSX is the world's tenth largest exchange, and while its largest companies are the ones that we've mentioned above, overall, there are more than a million additional small and medium enterprises in the country. According to data from the Canadian government, there were 1.2 million small and medium enterprises in Canada as of December 2021. A big chunk of these were located in Ontario, with significant numbers also present in Quebec and British Columbia. The services industry was the largest in Canada, with 955,542 businesses operating in this sector. Industry wise, the data attests to Canada's status as a developed and advanced country, since the highest number of businesses belonging to the professional, scientific, and technical services categories.
As to what the future might hold for the Canadian economy, and why inflation is a pressing problem, here is what the management of Royal Bank of Canada (NYSE:RY) had to say during the firm's second quarter of 2023 earnings call:
While recent stresses in the U.S. regional banking sector appear to have eased, the follow will likely include more liquidity and capital regulations and a subsequent tightening of lending capacity. The financial — Canadian financial system is already subject to many of these liquidity and capital requirements and performed exceptionally well through the recent U.S. regional banking liquidity crisis. It appears that the magnitude and steepness of Central Bank rate hikes has started to rain in headline inflation. Given signs of softening consumer demand for discretionary goods and rising debt service costs, we continue to forecast a mild recession, partly due to the lagging impact of higher interest rates on economic activity. However, with labor markets remaining firm despite declining levels of attrition and job postings combined with higher jobless claims, we do not expect central banks to cut interest rates through 2023.
With these details in mind, let's take a look at some undervalued Canadian stocks, out of which the top names are Enerplus Corporation (NYSE:ERF), Zymeworks Inc. (NASDAQ:ZYME), and Nutrien Ltd. (NYSE:NTR).
Undervalued Canadian Stocks To Invest In
Our Methodology
To compile our list of undervalued Canadian stocks, we first listed down Canadian companies with P/E ratio under 15 and a rating of Buy or higher. Then, the top 17 with the highest number of hedge fund investors that had bought their shares in Q1 2023 were determined courtesy of Insider Monkey's database. These were ranked through their trailing P/E ratio, and the top ten undervalued stocks are as follows.
Crescent Point Energy Corp. (NYSE:CPG) is an oil and gas company with operations in both America and Canada. While its operations in Alberta were affected due to wildfires, it announced in May that yearly production guidance remains intact due to a strong start to the year.
After digging through 943 hedge funds for their March quarter of 2023 shareholdings, Insider Monkey discovered that 16 had bought a stake in Crescent Point Energy Corp. (NYSE:CPG). Out of these, the firm's largest shareholder is Thomas E. Claugus's GMT Capital through a stake worth $33 million.
Along with Zymeworks Inc. (NASDAQ:ZYME), Enerplus Corporation (NYSE:ERF), and Nutrien Ltd. (NYSE:NTR), Crescent Point Energy Corp. (NYSE:CPG) is a great undervalued Canadian stock.
Canadian Natural Resources Limited (NYSE:CNQ) is another oil and gas company. It also has interests in a power generation plant, and the firm has been seeing strong analyst sentiment in July as five of the 14 analysts covering the stock rated it a Strong Buy.
Insider Monkey took a look at 943 hedge funds for their first quarter of 2023 investments to find out that 42 had held the firm's shares. Donald Yacktman's Yacktman Asset Management is Canadian Natural Resources Limited (NYSE:CNQ)'s largest hedge fund investor through a $842 million stake.
Canadian Solar Inc. (NASDAQ:CSIQ), as the name suggests, is a solar power company. It makes and sells solar cells, ingots, wafers, and other associated products. The firm's been on a roll lately, as it has beaten EPS estimates for all four of its latest quarters.
17 of the 943 hedge fund portfolios studied by Insider Monkey for 2023's March quarter had held a stake in Canadian Solar Inc. (NASDAQ:CSIQ). The firm's largest investor in our database is Ken Griffin's Citadel Investment Group courtesy of an investment worth $35 million.
Cenovus Energy Inc. (NYSE:CVE) is an oil company that produces heavy oil, natural gas, and natural gas liquids. Its a rare stock that is rated Strong Buy on average on our list and the shares are up 4.82% over the past month but down 5.81% year to date.
By the end of Q1 2023, 36 of the 943 hedge funds part of Insider Monkey's database had bought and owned the firm's shares. Cenovus Energy Inc. (NYSE:CVE)'s largest hedge fund shareholder is Eric W. Mandelblatt's Soroban Capital Partners through a $596 million stake.
Teck Resources Limited (NYSE:TECK) is a mining company that produces products such as coal, lead, zinc, and silver. Hedge fund White Falcon Management increased its stake in the company in Q2 2023, outlining in its investor letter that a strong demand for metals such as copper will serve as a potential catalyst for the firm.
In the prior quarter, 66 of the 943 hedge funds profiled by Insider Monkey had invested in Teck Resources Limited (NYSE:TECK). Eric W. Mandelblatt's Soroban Capital Partners is the largest investor through an investment worth $404 million.
Enerplus Corporation (NYSE:ERF), Teck Resources Limited (NYSE:TECK), Zymeworks Inc. (NASDAQ:ZYME), and Nutrien Ltd. (NYSE:NTR) are some undervalued Canadian stocks with high hedge fund interest.