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 Imperial Oil (NYSE:IMO) 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).
A close-up of an oil rig in motion with the ocean shining in the background.
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.
Overall IMO ranks 5th on our list of the undervalued Canadian stocks to buy. While we acknowledge the potential of IMO 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 IMO 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.
