We recently compiled a list of the 7 Undervalued Canadian Stocks To Buy According To Hedge Funds. In this article, we are going to take a look at where Cenovus Energy (NYSE:CVE) stands against the other undervalued Canadian stocks.

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).

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.

Overall CVE ranks 2nd on our list of the undervalued Canadian stocks to buy. While we acknowledge the potential of CVE as an investment, 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 CVE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.