It's difficult to argue any market as being undervalued in 2021, given we are on the back of a long bull run and a suspiciously rapid rebound from the pandemic crash. Though, the Canadian market certainly has some very good arguments for being so - if not in relative terms to its US counterparts, who are in a serious bull run with very high prices.
Four out of the five largest firms listed on the Toronto Exchange have a P/E ratio below the Nasdaq and Dow Jones average of 28. There are several $10+ bn companies with P/E ratios below 10, such as West Fraser Timber, Fairfax Financial, Manulife financial, and Thomson Reuters.
Whilst Tech rarely appears undervalued, growth has been strong along with an undervalued Energy sector, which proves to have some of the best Canadian stocks.
Energy Stocks
Making up 19% of the S&P/TSX Composite Index, energy is the second biggest sector. As we can see from the Energy Select Sector SPDR Fund, energy has been roaring back to life since November 2020, with month after month growth and a 24% YTD change.
ClearBridge have made their views on the impressive Energy sector very clear, stating "The first quarter saw the market giving the energy sector credit for its leverage to the eventual economic recovery as COVID-19 vaccines get rolled out through 2021."
"On a regional basis, North America was the top contributor to quarterly performance, of which U.S. energy infrastructure company Cheniere Energy and Canadian energy infrastructure company Enbridge were the lead performers."
This is recorded to be the biggest year for energy since 1990. We see this reflected in many Canadian large-cap stocks, such as Enbridge energy pipeline company, which has grown from 35.82 CAD in November to over 50 CAD in August.
Whilst TC Energy - the second largest energy firm in Canada - isn't up the same amount, it's performed consistently since the turn of the year, maintaining a respectable 5.86% dividend yield.
Finally, Canadian Natural has been up over 100% in the past 12 months, with a P/E ratio of 11.49.
Canadian Tech led by Shopify
Shopify is far and away the largest Canadian tech firm and has the largest market cap in the exchange. Whilst tech accounts for more than a quarter of the S&P 500, tech accounts for a lot less in the TSX. Though, this is hardly an indicator of their potential.
Despite a lot of promise in the TSX, its leader in Shopify is seemingly overvalued. It is a healthy company, with forecasted revenue growth, but it has an extraordinarily high P/E ratio of 74, way above the industry and market average. Almost any measure of value, such as price to book or price to earning growth, tells you it's a bad purchase. Yet, it continues to impress and perform.
Nuvei is an electronic payment processing
company that many have their eye on ever since it's been outperforming the TSX
since its IPO. With 51% average annual revenue growth expected and an extremely
sensible balance sheet, many are overlooking its insanely high P/E ratio as
their next growth investment.
Kinaxis, Descartes, and Enghouse Systems are three other tech stocks that have been profoundly outperforming the market for several years.
Why dividend stocks are my choice
When weighing up the value of tech stocks, it can be a real headache. Some appear very overvalued (Canadian or otherwise), but with strong revenue and price growth potential. This is why my favorite type of Canadian stocks are dividend stocks. If you're looking for more stable growth, reliability, and underpricing, then Canadian dividend stocks may just be the way forward.
The financials of large Canadian dividend stocks cannot be doubted, with reliable year-on-year payouts and low Betas.
For example, Enbridge is a behemoth in the market, having the 6th largest market cap on the TSX, and has an impressive dividend yield of 6.91%. Dividends have never been reduced in their ten-year history, and ClearBridge has also stressed their impressive performance in helping rebound the Canadian market from the pandemic crash.
Sticking with the belief in Canadian Energy and its importance to the market, TC Energy Corporation is also a dividend stock of particular interest. TC Energy has a dividend yield of 5.86%, saw steady YTD growth, and an extremely impressive 0.76 5Y Monthly Beta. TC Energy is as reliable as they come, and has huge influence over Canada, providing pipelines all across Canada, the US, and Mexico. These are a great way to calm down a portfolio with some low volatility and stable dividend growth.
With Simply Wall St undervaluing Exchange Income Corporation - a Canadian acquisition corporation involved in aerospace and aviation - by a massive 49%, this is third on the list of dividend stock picks. The company increased its revenue by $78 from Q2 2020 to Q2 2021, a 32% increase. Its EBITDA was $81 million in Q2, which was also up 31% from Q2 2020.
Exchange Income Corporation has a dividend yield of 5.31% and is flawlessly reliable in its payouts like the others. Furthermore, aerospace is in a unique moment currently, where it's becoming commercialized with lots of future growth potential.
Whilst every investor has their own strategy towards a healthy portfolio mix, these are some examples of why dividend stocks can be a great addition to a portfolio. Regular income, low Betas, and steady growth.
