Canadian Undervalued Stocks December 2024

Undervalued stocks in Canada are usually identified as having a market value that is for one reason or another below their true value. The idea is that if you as an investor are able to identify these stocks while their purchase price is still low. Then, someday in the future, when the rest of the world catches on, you’ll have made a pretty penny for your foresight.

Usually, this investment strategy takes a whole lot of time and effort. You’ll have to research companies in depth, taking a look at things like cash flow, balance sheets, profits, and so on. But luckily for you, I’m giving you the rundown on the best undervalued stocks in Canada.

Let’s get right into the top undervalued banking and energy stocks in Canada, including their P/E ratio, yields, payout ratios, building a dividend portfolio with undervalued stocks and more. All of the info suggested here is based on Dividend Stocks Rock advanced tools and analysis.

11 Best Canadian Undervalued Stocks

When looking for the best undervalued stocks, you’re looking for established companies with a long history. Ideally, they are companies with steady year-over-year growth, as well as decent dividend payouts. In Canada, banks and oil and energy stocks do just that, which is why they are our top picks for undervalued stocks.

Undervalued Banks Stocks in Canada

Now it’s time to put some of the strategies stated above into practice so let’s start with some of the largest companies in Canada –  the big banks.

I like to compare the big banks to each other, and from my experience, a P/E comparison is a quick and effective way to determine if one bank is relatively undervalued compared to another.

Here is a table comparing all the big banks with the data provided updated as of October 12, 2022:

if I had to add to a big bank today, it would probably be CIBC or Scotia Bank.  In terms of P/E they are lower than the rest, and both have a healthy market cap (size). You can read more about that in my investing in Canadian banks guide.

Undervalued Oil And Energy Stocks in Canada

For those of you still interested in energy stocks, there are a few left in Canada that are investable. In my mind, here are the top undervalued energy dividend stocks in Canada:

For this table, to keep things fair, I would compare ENB vs TRP and CNQ vs SU vs Tourmaline. From a yield perspective, it looks as though both ENB and TRP could be undervalued here. CNQ must have negative earnings, which results in P/E showing as n/a.  However, from a yield perspective, it looks as though CNQ may be undervalued and SU slightly overvalued.

If clean energy is more your thing, check out our pick of the Best Renewable Energy Stocks in Canada.

Best Stocks to Buy for Under $1

Look – we get asked all the time about the best penny stocks in Canada or the best Canadian stocks to buy for under a dollar.

But the honest truth is that trying to figure out that volatile world is a nightmare.  The metrics are incredibly difficult to project into the future and often the companies do not offer any long-term competitive advantage (unlike undervalued Canadian bank stocks or energy stocks).

Before you look at buying stocks under $1, I’d ask you to do a little reading on the risk levels associated with these companies.  Personally, I don’t own any of these companies in my portfolio, so I wouldn’t be comfortable recommending them to others.

However, if you are still interested in cheap stocks, check out our thoughts on the Best Penny Stocks in Canada.

A third factor that I consider before adding to a position is the use of basic technical analysis, more specifically, using the long-term moving average.  

How Do I Determine Canadian Undervalued Stocks?

Ok onto why you are here, how do I determine when Canadian dividend stocks are undervalued?  I tend to use a combination of methods and here are the three that I use most often.

Relative P/E Ratios

A common metric for determining when stocks are undervalued is the Price to Earnings ratio, otherwise known as the P/E ratio.  In this ratio, the stock price is divided by its annual earnings to come up with a number.  The lower the number, the “cheaper” the stock. 

The one thing about this ratio is that it can be deceiving in that “earnings” can be manipulated with creative accounting.  As well, some industries often report relatively low “earnings” but have strong cash flow (like real estate investment trusts).  Another variable, sometimes the market rewards growth companies with a higher P/E. 

As you can see, P/E ratio can be subjective and not a great single measure of value, but I often use the P/E ratio as a comparison and starting point when researching strong companies within the same sector.

For example, BCE and Telus are head to head competitors.  Both are dividend growth stocks (I own them both), have a strong mobile footprint, and have a history of growing their dividend on an annual basis.

Right now, BCE is trading at a P/E ratio of 19.24 while Telus is trading at a P/E ratio of 18.4.  I will say that historically, the P/E ratios for both companies right now are on the high side (ie. appear expensive), and in this case, BCE appears “cheaper” than Telus. 

While strictly from a P/E ratio valuation perspective, you could pick BCE as your choice, but if you look at the growth prospects of Telus Health and other ventures, along with people cutting their BCE cable TV at an increasing rate, which is the better choice?  It’s hard to choose from a P/E ratio perspective.

Average 5-year Yield

Another way that you can see if a company is trading at below their historic levels is to compare its current yield to its 5-year average yield. Remember that dividend yields go up as the stock price goes down.  

So if the current yield is higher than the 5-year average (ie. attractive), then it may be a good starting point for your research on why it’s trading lower, and if you expect the fundamental business to continue growing going forward.  If everything appears normal and it seems that the market is just being temperamental, then it may be time to start/add to that position.

For example, as of this post, TRP is trading with a yield of 6.60% and their 5-year average yield is 5.54%.  This indicates that it may be a good time to add to (or initiate) your TRP position depending on if you like their business prospects going forward.

Payout Ratio

A payout ratio is the percentage of earnings a company pays its shareholders, usually in the form of dividends. 

One way payout ratio is calculated is by dividing the dividends by net income:

Dividends/Net Income = Dividend Payout Ratio

A healthy payout ratio isn’t too low or too high. A high percentage means the company is paying out a considerable amount of their earnings, which means their cash flow will be tight. A low payout ratio could mean the company is in a growth phase and needs to reinvest profits to grow its operations.

Generally speaking, when it comes to building up a dividend portfolio, you’ll be looking for an ideal payout ratio of 30-50% as it shows the company is considering its investors, and wants to reward them, while maintaining growth of the company.

It’s important to point out that pipeline companies are an exception to this ideal ratio. Let’s take Enbridge (ENB) for example, with its 140% payout rate. At first glance, this might seem highly unsustainable, and therefore risky.

The reason is because companies like Enbridge calculate the payout ratio based on distributable cash flow, so the actual payout ratio is closer to 60-70%. This still might seem high, but it’s a strong company with a long track record of solid dividend payouts, so it’s still a safe bet.

Technical Analysis – Using Moving Averages

A third factor that I consider before adding to a position is the use of basic technical analysis, more specifically, using the long-term moving average.  

Personally, I tend to add to positions when they are on an uptrend but have pulled back to their long-term moving average, like the 200 day simple moving average (SMA).

In the example below, I had a position in BIPC but noticed after a strong uptrend (first arrow) that it was selling off and it pulled back (second arrow) close to the 200 day moving average.  I like the future prospects of BIPC and added to my position in the circle area.

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My Dividend Portfolio

If you are looking for a great way to achieve financial independence using stocks as a way to help you get there, Canadian undervalued stocks might be the best way to go. Dividend paying stocks in particular have the potential to give you returns that you can live on, paying your living expenses, giving you the financial freedom you’ve been working toward.

As many of you know, I use the dividend investing strategy for the Canadian portion of my portfolio.  To summarize the strategy, I essentially own the largest dividend paying companies that have a history of annually increasing their dividend. 

I started building my dividend portfolio many moons ago (around 2008), and it has grown to the point where it can support our annual recurring expenses.  We have achieved financial independence.

In my financial freedom updates, I list my top 10 dividend holdings and I also point out that I add to my positions when they appear cheap. 

The most recent update had the following top 10 positions:

1. TD Bank (TD)
2. CIBC (CM)
3. Canadian National Railway (CNR)
4. Royal Bank (RY)
5. Scotia Bank (BNS)
6. Bank of Montreal (BMO)
7. Fortis (FTS)
8. Enbridge (ENB)
9. Emera (EMA)
10. TransCanada Corp (TRP)

These top 10 positions vary quite a bit over time as their values go up and down.  However, while their value goes up and down, these top 10 tend to pay dependable dividends that tend to increase over time.  As I plan on living off dividends in the near future, income dependability is a high priority.

If you are just starting out, check out my post on how to build a dividend portfolio. The post shows that I tend to pick the leaders in each sector that pays a dividend and own them forever. 

Here are some market leaders and a starting point for your research: 

• Telecom – BCE (BCE), Telus (T), Rogers (RCI.B)
• Pipelines – Enbridge (ENB), TransCanada Corp (TRP).
• Banks – Any of the big banks: Royal Bank (RY), Toronto Dominion Bank (TD), Scotia Bank (BNS), Bank of Montreal (BMO), CIBC (CM); Insurance: Manulife (MFC),  Great-West Life (GWO), Sunlife (SLF).
• Resources and Materials – Suncor (SU), Canadian Natural (CNQ), Teck Resources (Teck.b)
• Utilities – Fortis (FTS), Canadian Utilities (CU), Emera (EMA), Brookfield Infrastructure Partners (BIP.UN/BIPC), Algonquin (AQN).
• Health Care – Canada is weak in this sector in terms of dividend stocks.
• Consumer – Empire (EMP.A), Loblaws (L), Canadian Tire (CTC), Dollarama (DOL)
• Industrials – Canadian Pacific Railway (CP), Canadian National Railway (CNR), Finning International (FTT), Waste Connections (WCN)
• Technology – Enghouse (ENGH), CSU
• Real Estate – Riocan (REI.UN), CHP.UN, CAR.UN 

When building a dividend portfolio, I believe that it’s important to simply initiate a position and keep adding to it as it becomes undervalued and/or when new savings become available to invest.

To learn more about the Best Canadian Dividend Stocks, check out our full article where we give you all the details on how you can build a passive income portfolio too. 

Final Thoughts

Choosing the best Canadian undervalued stocks takes a bit of understanding beyond what you need to know for a more straightforward buy and hold type of purchase. However, once you know the basics, it’s pretty straightforward. 

It’s really about looking for companies with a strong performance history and digging into a few key metrics to help you make your pick. Companies that are well established and have a decent growth record are going to be a good bet when it comes to buying undervalued stocks. Another key to helping you maximize returns on undervalued stocks is buying when the selling price dips, knowing it is likely to rebound and grow in the future.

An added bonus of these stocks is that you’ll get dividend payouts, so you can use your returns at the time of payout rather than decades. This is a big bonus for those looking to add money to their wallets without extra work.

Interested in learning more about the best dividend stocks in Canada? Head over to our Canadian Dividend Kings List and our Dogs of the TSX Dividend Stock Picks.