2 Undervalued Canadian Stocks Set for a Bull Run

A bull outlined against a field

With the TSX Index showing signs of life in November, with a very quick 6.5% surge (and count), investors may wish to pick up a few undervalued stocks before the price of admission has a chance to rise. Indeed, a sudden spike in markets could precede an equally steep drop-off. Regardless, investors should be ready to keep rolling with the punches that the market may or may not continue throwing our way.

Though last month’s rally was substantial, the TSX Index remains off around 9% from its all-time highs. Whether new highs will be breached in the coming months remains a mystery. The bull camp seems hopeful that rates have peaked and have nowhere else to go but down. Indeed, lower rates would be welcomed, especially by dividend and REIT (real estate investment trust) shareholders.

Inflation may be showing signs of normalizing, but until worry shifts from inflation to deflation, investors shouldn’t attempt to time the Bank of Canada or U.S. Federal Reserve. Just because more rate hikes seem less likely doesn’t mean cuts are on the horizon.

Either way, here are two undervalued stocks that could run from here, with or without the jolt of lower interest rates.

Royal Bank of Canada

Royal Bank of Canada (TSX:RY) and the rest of the Canadian banks are overdue for more relief after yet another year of choppy action. Year to date, shares of RY are down 7%. Indeed, the $166 billion behemoth has been through its fair share of downturns before. Even if the next recession hits hard, Royal Bank is bound to recover in due time, thanks to its excellent risk managers.

The likeliest case, I believe, is that 2024 isn’t nearly as hideous as cautious investors have been prepping for. Whether that entails a short-lived recession or a sustained recovery aided by a few rate cuts, I think expectations are too modest for Canada’s top bank.

The stock trades at a more than reasonable 11.49 times trailing price to earnings (P/E) to go with a 4.54% dividend yield. My takeaway? It’s time to start buying, with both hands!

Onex

Onex (TSX:ONEX) is a relatively small $7 billion company that more Canadians ought to know about. The stock has quietly soared over 37% year to date and could be headed much higher if the economy isn’t due for a beating over the coming months. The investment manager owns some pretty compelling assets, including Westjet Airlines, which could fare well in a Canadian economic comeback.

Momentum investing may not be everyone’s cup of tea. The stock is red hot on the year. Still, value investors have plenty to love from the name, as well, with shares going for 9.39 times trailing P/E at writing. Indeed, momentum and value may suggest the 2023 rally has room to run in 2024.

Personally, I think new highs could be ahead if the firm can keep beating the (relatively modest) estimates.

The bottom line

You don’t need to look far for undervalued plays on the TSX Index. Royal Bank and Onex are top-tier value picks I’d look to outperform in the new year, as rates, inflation, and investors find their cool.

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* Returns as of 11/14/23

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.