The Canadian market has been punishing some blue-chip names lately, leaving two standout stocks looking like bargains despite rock-solid fundamentals.
Here are two of my top picks for investors looking for the most hated and beaten-down undervalued stocks in the market right now, relative to their growth potential.
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Telus
In the world of Canadian telecommunications giants, Telus (TSX:T) is a company I’m starting to come around on.
With a number of concerns around the viability of Telus’s dividend (and specifically its payout ratio), this is a stock that’s been battered over the course of the past three years. Indeed, three years of down returns have pushed a number of market participants to look for better dividend stocks in this environment.
That said, I’d argue the combination of telecom sector jitters and high debt fears that helped propel this stock lower could be abating. After all, Telus is a cash machine with a monster dividend (and one that looks on much better footing than it did a couple of years back).
With a forward price-to-earnings ratio now sitting below 20 times, this is a stock I’d argue proves excellent value. With more than two decades of consecutive annual dividend increases and a healthy operating margin, this is a stock that should continue to plow forward over time. Personally, Telus is a company I’m looking at potentially legging into here, but every investor has their own risk profile and time horizon — that’s what makes markets.
Canadian National Railway
Another defensive Canadian stalwart I think investors should consider right now is Canadian National Railway (TSX:CNR).
Canadian National’s shares are down 17% over the past year on freight slowdown scares and trade tariff talk. Those are headwinds most investors can easily understand. However, I’d argue this rail giant’s fortress balance sheet screams buy.
Trading at a trailing price-to-earnings ratio of less than 20 times, CNR stock is definitely undervalued versus peers. And with pristine operating metrics (a return on equity of more than 22% and a return on invested capital also in the double-digit territory), this is a stock I think should continue to provide strong operating cash flow to support its robust 2.4% dividend yield.
As a way to play broader Canadian and North American growth over the long term, Canadian National remains a top stock that I think investors can put in their portfolios as a core holding. Personally, this is one I’m waiting for a pullback from its recent rally to buy into (wish my research brought me to this conclusion a week or two ago, but here we are).