The S&P/TSX Composite index is having a great year so far, with total returns of over 9% year to date. The S&P 500 has returned around 4.4% in Canadian dollars for the same time period.
With markets rising, are there any stocks that are still cheap? Turns out, yes, there are. Using Morningstar Direct, we found 49 stocks that are currently trading below our fair value estimates.
We decided to take a look at the 10 most undervalued of these. Before we present the list, though, it is important to note that all of these stocks have high fair value uncertainty.
Why does this matter? As Susan Dziubinski, Morningstar.com’s director of content explains, stocks with lower uncertainty ratings have sales predictability, modest operating and financial leverage, and limited exposure to contingent events.
“As a result of these factors, we can more confidently estimate the future cash flows of these companies--and therefore have high confidence in our fair value estimates. Higher uncertainty companies, meanwhile, have less predictable cash flows; we're therefore less confident in our fair value estimates for these firms,” she notes.
That being said, here’s a list of 10 cheap stocks trading well below Morningstar analysts’ fair value estimates.
| Name | Fair Value Uncertainty | Economic Moat |
M* Rating Overall | Industry | |
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| Eldorado Gold Corp | Extreme | None | 4 | Gold | |
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| Bombardier Inc | High | None | 5 | Aerospace & Defense | |
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| Cenovus Energy Inc | Very High | None | 4 | Oil & Gas Integrated | |
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| Cameco Corp | High | Narrow | 4 | Industrial Metals & Minerals | |
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| Crescent Point Energy Corp | Extreme | None | 3 | Oil & Gas E&P | |
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| Blackberry Ltd | Very High | None | 4 | Communication Equipment | |
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| CI Financial Corp | High | Narrow | 4 | Asset Management | |
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| BRP Inc | High | Narrow | 4 | Recreational Vehicles | |
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| Iamgold Corp | Very High | None | 4 | Gold | |
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| Power Corporation of Canada | High | None | 4 | Insurance - Life | |
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Cameco Corp (CCO)
Discount to fair value estimates: 38%
Four-star rated Cameco is one of the world's largest uranium producers and miners, and also operates uranium conversion and fabrication facilities.
Amid uranium production cuts, falling producer inventories, and the construction of new reactors, the uranium supply and demand balance will continue to improve. However, Cameco warns that long-term uranium contracting has not returned in meaningful quantities, leaving prices too low to restart any production, says Morningstar analyst Kristoffer Inton.
“A number of financial investors who’ve acquired uranium as an investment during the downturn will still sell, which will probably weigh on the spot market's recovery for some time. We think Cameco’s strategy makes sense, though, as it leaves production offline to prevent market oversupply and inventory buildup,” he says.
He says that the company continues to purchase tons out of the spot market to deliver on contracts. The ongoing recovery has yet to hit long-term prices and thus Cameco’s contracts, and more attractive market conditions are yet to come.
“The shares look undervalued as the uranium price recovery remains in early stages”, Inton says.
CI Financial Corp (CIX)
Discount to fair value estimates: 26%
Four-star CI Financial is a diversified provider of wealth management products and services, primarily in the Canadian market. The company had $130 billion in assets under management, and another $42.5 billion in assets under advisement, at the end of October 2018, making it the second-largest non-bank-affiliated asset manager in Canada.
"We believe CI Financial's long-term track record of above-average investment performance has served it well as it has come under greater competitive pressures from the Big 6 Canadian Banks," said sector strategist Greggory Warren. However, he warns that 2016-18 has served as a reminder of just how difficult the asset management business can be, as some short-term performance issues and several institutional clients moving their assets to in-house portfolio management has led to negative organic growth-the first time in over a decade that this has happened at CI Financial.
Morningstar assigns CI Financial a narrow economic moat, derived from both switching costs and intangible assets.
BRP Inc (DOO)
Discount to fair value estimates: 25%
Four-star BRP designs, makes and sells snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names. In 2018, the company created a new marine group, acquiring boat manufacturers Alumacraft and Triton, which makes Manitou pontoon boats.
Morningstar senior equity analyst Jaime Katz points out that BRP's articulated strategic priorities include growth, agility, and lean focus. And with watercraft and all-terrain vehicle production moving to Mexico, the supply chain is closer to consumer demand, helping BRP capture incremental cost savings in its manufacturing processes.
“We think an entry into white-space categories and small acquisitions, particularly in parts, garments, and accessories are likely, and could boost margins incrementally. BRP's brand intangible asset and leading market share position result in competitive returns on invested capital and a narrow economic moat. With improvements to the manufacturing process to add capacity and scale, we think BRP could also develop a cost advantage over time,” she says.
