In this article, we will look at the 7 Undervalued Canadian Stocks To Buy According To Hedge Funds.
Canada’s Economic Outlook
According to the report Economic Outlook Canada Q4 2024, released by S&P Global on September 24, Canada’s economy shows signs of improvement, with growth expected to gain momentum in the coming years. S&P Global forecasts a 1.2% GDP growth in 2024 and a 2.0% growth in 2025, which still falls short of the country’s potential growth rate of 1.8%. However, a recovery in 2025 is expected to be driven by fixed investment, particularly residential and non-residential, rather than consumer spending. Consumer spending will remain subdued due to the cumulative effect of higher interest rates. Changes to immigration policies and their effectiveness are key uncertainties in the forecast.
The labor market in Canada is softening, with weaker hiring and rising unemployment. Wage growth is outpacing productivity growth, which is inconsistent with 2% inflation. The unemployment rate is expected to rise to 7% by the end of 2024 before falling in 2025. Despite this, the Bank of Canada (BoC) is shifting its focus to downside risks to the economic growth outlook. The BoC has already cut interest rates for the third consecutive time and is expected to continue making 25 basis point cuts in the fourth quarter and January.
Canada: A Prime Destination for Foreign Direct Investment
Canada is one of the world’s top destinations for foreign direct investment. Warren Buffett expressed a positive view of investing in Canada, stating that Berkshire Hathaway has a significant presence in the country with many operations and investments across various entities. He feels comfortable investing in Canada, just like in the US, as he understands the business environment and economy. Buffett noted that Canada’s economy moves closely with the US, and the results from his company’s businesses with Canadian operations are consistent with those in the US. He is open to investing in Canada, citing a past example where his company invested in a Canadian financial institution. Buffett stated that his company has no “mental blocks” about investing in Canada and views the country as a “terrific” place to operate. He also mentioned that Canada is a major economy that his company feels confident about operating in and that they are currently looking at a potential investment opportunity in the country.
Investing in Canada, particularly in the Atlantic region, presents a unique opportunity to capitalize on the growing demand for green hydrogen and its applications. Green hydrogen production can be leveraged to create new industries, such as ammonia and fertilizer production, as well as green steel, which can be produced using the region’s abundant natural resources and innovative technologies.
Canada’s economy is showing signs of improvement, with growth expected to gain momentum in the coming years. The Bank of Canada’s monetary policy adjustments and the recovery in fixed investment are expected to drive growth in 2025. With that in context, let’s take a look at the 7 undervalued Canadian stocks to buy according to hedge funds.
Our Methodology
To compile our list of 7 undervalued Canadian stocks to buy according to hedge funds, we used the Finviz and Yahoo stock screeners to find the largest Canadian companies. From that list, we screened for companies that are trading at a forward P/E ratio of under 15, as of September 25. We then narrowed our choices to 7 stocks according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their hedge fund sentiment, as of the second quarter.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Undervalued Canadian Stocks To Buy According To Hedge Funds
7. Bank of Nova Scotia (NYSE:BNS)
Number of Hedge Fund Investors: 14
Forward P/E Ratio as of September 25: 11.27
Bank Of Nova Scotia (NYSE:BNS), also known as Scotiabank, is a Canadian multinational bank with a strong presence in Latin America, particularly in Mexico, Chile, and Peru.
Bank of Nova Scotia’s (NYSE:BNS) focus on international growth and solid domestic banking business position it for long-term expansion. In Q3, Bank of Nova Scotia (NYSE:BNS) demonstrated significant progress in its customer growth, with 143,000 net new clients added to its Canadian Retail and Tangerine businesses. The company’s growth prospects are also encouraging, with adjusted EPS expected to rise by 7.6% in FY 2025 and another 15.7% in FY 2026.
On August 30, Bank Of Nova Scotia (NYSE:BNS) announced the initial purchase of KeyCorp’s (NYSE:KEY) stock with an investment of approximately $800 million. Nova Scotia (NYSE:BNS) now owns approximately 4.9% stake in KeyCorp (NYSE:KEY), which is one of the largest bank-based financial services companies in the United States, with assets of approximately $187 billion as of June 30, 2024. The acquisition of KeyCorp (NYSE:KEY) is expected to gradually grow Nova Scotia’s (NYSE:BNS) return on equity (ROE) by approximately 45 basis points.
Bank Of Nova Scotia’s (NYSE:BNS) strong financial health, growth prospects, and attractive dividend yield make it a compelling investment opportunity for investors seeking income and growth. Bank Of Nova Scotia’s (NYSE:BNS) stock is trading at a forward PE of 11.27, a 5.97% discount to its sector median of 11.27. As of the second quarter, Bank Of Nova Scotia’s (NYSE:BNS) stock is held by 14 hedge funds with stakes worth $62.26 million. Marshall Wace LLP is the largest shareholder in the company and owns stocks worth $19.29 million as of June 30.
6. Sun Life (NYSE:SLF)
Number of Hedge Fund Investors: 14
Forward P/E Ratio as of September 25: 11.59
Sun Life (NYSE:SLF) is a leading global financial services company that provides insurance, wealth management, and retirement solutions to both individual and corporate clients. The company operates in various international markets, including Canada, the United States, and Asia.
Sun Life (NYSE:SLF) has been focusing on expanding its asset management business and leveraging its leadership in the life insurance market to drive future growth. In Q2, Sun Life (NYSE:SLF) showcased strong growth in the domestic market and impressive returns from its expansion into Asia, with a record underlying net income of $740 billion. Sun Life’s (NYSE:SLF) strategic partnerships with local business giants in Asia, such as Everbright Group in China and Aditya Birla Group in India, provide a strong foundation for growth in these fast-growing markets.
The growing middle class in Asia presents a substantial opportunity for the company’s expansion, particularly in markets such as India, Indonesia, and the Philippines. The company offers micro insurance products in India and Sharia-compliant products in Indonesia, which are expected to drive significant growth. Furthermore, Sun Life’s (NYSE:SLF) digital transformation efforts, including the incorporation of AI tools, will help drive operational efficiency and attract customers. The Indian life insurance market is expected to grow to $216 billion by 2028 with a CAGR of 10%, making it an attractive market for the company’s growth.
Sun Life (NYSE:SLF) is an attractive investment opportunity for dividend investors. As the company continues to execute its expansion strategy and grow its presence in Asia, analysts believe that Sun Life’s (NYSE:SLF) is a good investment opportunity. The company’s stock is trading at a forward PE of 11.59, a 3.34% discount to its sector median of 11.99. Analysts forecast the company to increase its earnings by 5.43% this year. As of the second quarter, the stock is held by 14 hedge funds, and the stakes amount to $123.25 million. GLG Partners is the largest shareholder in the company and owns stocks worth $44.17 million as of June 30.
5. Imperial Oil (NYSE:IMO)
Number of Hedge Fund Investors: 18
Forward P/E Ratio as of September 25: 10.86
Imperial Oil (NYSE:IMO) is one of Canada’s largest integrated oil companies, with operations in exploration, production, refining, and petroleum product distribution. The company is a majority-owned subsidiary of ExxonMobil and plays a significant role in Canada’s energy industry, especially in the oil sands sector.
In May, Imperial Oil’s (NYSE:IMO) Grand Rapid project started producing oil at its Cold Lake site in Alberta using solvent-assisted technology. This new technology reduces greenhouse gas emissions by up to 40%, a big step towards the company’s goal of reducing its oil sands emissions by 30% by 2030. The project is expected to produce 15,000 barrels of oil per day. Additionally, the company is expanding its Cold Lake oil sands facility with the Leming redevelopment, which will start in 2025. Once fully operational, the project will increase production by 9,000 barrels per day and produce 20,000 barrels per day of diesel.
Imperial Oil’s (NYSE:IMO) strong production growth and innovative projects position it for long-term success. The company’s stock is trading at a forward PE of 10.86, a 5.42% discount to its sector median of 11.48. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $74.39, which represents an almost 4% upside potential from its current levels. Analysts expect the company to increase its earnings by almost 4% this year. As of the second quarter, Imperial Oil’s (NYSE:IMO) stock is held by 18 hedge funds with stakes worth $76.36 million.
4. Royal Bank Of Canada (NYSE:RY)
Number of Hedge Fund Investors: 21
Forward P/E Ratio as of September 25: 13.92
Royal Bank Of Canada (NYSE:RY) is the largest financial institution in Canada by market capitalization. The bank provides various financial products and services, including personal and commercial banking, wealth management, and investment banking. Royal Bank Of Canada (NYSE:RY) has a robust international presence, particularly in the U.S. and Caribbean, and continues to grow through strategic acquisitions and digital innovation in financial services.
Royal Bank Of Canada (NYSE:RY) focuses on earning interest income from loans and deposits, as well as fees from asset management and other services. The company’s mortgages are highly regulated. This has resulted in a portfolio with a high percentage of prime mortgages, with 83% of mortgages having a FICO score above 720. Furthermore, the Canadian housing market is supported by strong population growth and limited supply, which should continue to drive demand for housing and support the bank’s mortgage business.
In March, Royal Bank Of Canada (NYSE:RY) acquired HSBC Canada which is poised to expand its footprint in Canada significantly. The company’s wealth management business is also a key driver of growth, with assets under administration increasing by 15% year-over-year. With its strong brand, extensive network, and commitment to innovation, Royal Bank Of Canada (NYSE:RY) is well-positioned to continue to grow its market share and deliver strong returns to shareholders. The company’s stock is trading at a forward PE of 13.92. Analysts forecast the company to increase its earnings by 5.79% this year. As of the second quarter, the stock is held by 21 hedge funds, and the stakes amount to $143.93 million. D E Shaw is the largest shareholder in the company and owns stocks worth $34.86 million as of June 30.
3. Suncor Energy (NYSE:SU)
Number of Hedge Fund Investors: 44
Forward P/E Ratio as of September 25: 9.79
Suncor Energy (NYSE:SU) is a Canadian integrated oil and gas company that operates in the energy sector. The company is headquartered in Calgary and is one of the largest integrated oil and gas companies in North America. Suncor Energy (NYSE:SU) is engaged in the exploration, development, and production of crude oil and natural gas, as well as the refining and marketing of petroleum products.
Suncor Energy’s (NYSE:SU) integrated business model provides a significant competitive advantage in the energy sector. The company’s diversified operations enable it to optimize its operations and reduce costs. Suncor Energy (NYSE:SU) has a large reserve base of over 7 billion barrels of oil, which provides a long-term source of production and revenue. The company’s operations are also characterized by low costs, with a corporate decline rate of just 5%.
Suncor Energy (NYSE:SU) has made significant progress in reducing its costs and improving its operational efficiency. The company has implemented various initiatives to reduce its operating expenses, including the use of advanced technologies and optimized production processes. These efforts have resulted in significant cost savings and improved profitability. In Q2, the company’s net debt decreased by $500 million and is now only $1.1 billion above its $8.0 billion target.
Suncor Energy (NYSE:SU) is trading at a forward PE of 9.79, a 14.67% discount to its sector median of 11.48. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $44.86, which represents a 16% upside potential from its current levels. As of the second quarter, Suncor Energy’s (NYSE:SU) stock is held by 44 hedge funds with stakes worth $2.85 billion. Elliott Management is the largest shareholder in the company and owns stocks worth $2 billion as of June 30.
2. Cenovus Energy (NYSE:CVE)
Number of Hedge Fund Investors: 46
Forward P/E Ratio as of September 25: 9.51
Cenovus Energy (NYSE:CVE) is a Canadian oil and natural gas production that is engaged in the exploration, development, and production of crude oil and natural gas in Western Canada, the United States, and other international locations. Cenovus Energy (NYSE:CVE) has a diverse asset base, including conventional oil and gas fields, oil sands operations, and a refining segment. The company’s refining segment includes two refineries in the United States.
In Q2, Cenovus Energy (NYSE:CVE) produced 800,800 barrels of oil equivalent per day, ahead of consensus expectations. The company also upgraded its guidance for downstream performance, which suggests that Cenovus Energy (NYSE:CVE) is poised for a strong second half of the year. The company’s free cash flow yield is significantly higher than its peers, and it is using it to focus on production and its refining segment, which provides a stable source of cash flow and will enable the company to return value to shareholders through share buybacks.
Cenovus Energy (NYSE:CVE) has achieved its net debt target of $4.0 billion and is now focused on returning value to shareholders through share buybacks. The company has announced that it will allocate 100% of its excess free cash flow towards share repurchases, which will help to reduce its share count and increase its earnings per share.
Cenovus Energy (NYSE:CVE) is an attractive investment opportunity for investors looking for a high-quality energy company with strong growth prospects. The company’s stock is trading at a forward PE of 9.51, a 17.14% discount to its sector median of 11.48. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $24.67, representing a 34.78% upside potential from its current level. Analysts expect the company to increase its earnings by almost 15% this year. As of the second quarter, the stock is held by 46 hedge funds, and the stakes amount to $1.21 billion. Millennium Management is the largest shareholder in the company and owns stocks worth 297.46 million.
1. Canadian Natural Resources (NYSE:CNQ)
Number of Hedge Fund Investors: 46
Forward P/E Ratio as of September 25: 12.77
Canadian Natural Resources (NYSE:CNQ) is one of Canada’s largest independent oil and gas producers. The company explores, develops, and produces crude oil and natural gas in Western Canada, the United Kingdom, the North Sea, offshore Africa, and other international locations.
Canadian Natural Resources (NYSE:CNQ) total production has been steady at around 1.3 million barrels per day for the past few years. Management is waiting for more favorable market conditions as natural gas prices improve. Canadian Natural Resources (NYSE:CNQ) is expected to increase production, which will drive up revenue and gross profit. The company’s unit economics, as measured by netback analysis, have already shown a steady recovery, increasing from $20.64/bbl to $28.68/bbl in Q2 compared to the same quarter in the previous year. This trend is expected to continue, with netbacks potentially reaching $30-35/bbl levels, driven by operational improvements and higher natural gas prices.
The US Energy Information Administration’s (EIA) short-term energy outlook forecast suggests that natural gas prices are expected to increase over the next year, driven by increased liquefied natural gas (LNG) exports. This positive trend is expected to benefit Canadian Natural Resources (NYSE:CNQ), which has intentionally held back on natural gas production, with approximately 20% of its remaining 2024 planned natural gas wells drilled but production curtailed, Canadian Natural Resources (NYSE:CNQ) is well-positioned to capitalize on the expected price increase.
Canadian Natural Resources’ (NYSE:CNQ) stock is trading at a forward PE of 12.77. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $40.64, which represents a 16% upside potential from its current levels. As of the second quarter, the company’s stock is held by 46 hedge funds with a stakes worth $3.77 billion. Fisher Asset Management is the largest shareholder in the company and owns stocks worth $1.49 billion as of June 30.
While we acknowledge the potential of Canadian Natural Resources (NYSE:CNQ) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CNQ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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