Investing in stocks outside of major indexes is a little like shopping at a dollar store – while you need to be picky, you can find comparable quality at steep discounts.
In Canada, the stocks in the S&P/TSX Composite Index get the vast majority of investor attention.
The biggest index funds funnel their investors’ money into the S&P/TSX’s component stocks, while most stock pickers tend not to stray far from the comforts of the index.
“A lot of stocks become overvalued just because of the fact that they’re in the Composite. The exact opposite is true for a lot of the names that are outside of it,” said Peter Imhof, portfolio manager at AGF Investments Inc.
In other words, there can be good value among the overlooked. There are also many potential hazards.
The pool of nearly 4,000 stocks listed in Canada is littered with risky junior resource plays, micro caps and penny stocks that the average investor would be wise to rebuff.
As a shortcut to finding safer stocks, we used sell-side stock ratings to screen for lesser-known names outside the S&P/TSX with a high level of analyst support.
Three stocks emerged from the masses: Tamarack Valley Energy Ltd., Tidewater Midstream and Infrastructure Ltd., and Champion Iron Ltd.
All three have at least 10 analysts following them, and all three are unanimously recommended by those analysts – all buys, no sells. Think of them as cult stocks – outside of the mainstream but with a devoted following.
As always, investors are advised to do their own research before buying any security.
Tamarack Valley Energy Ltd.
Shortly after it was announced that Tamarack Valley would be removed from the S&P/TSX Composite Index last December, the stock hit a 5½-year low, having declined by nearly 65 per cent in less than three months up to that point. And the stock has barely budged since.
There is very little investor interest in the Canadian energy sector as a whole right now, let alone a Canadian small-cap light oil producer.
But Bay Street clearly sees promise, with the stock currently garnering buy recommendations from 17 separate equity analysts.
“It offers investors a strong margin of safety with a rock-solid balance sheet and a discounted valuation,” Chris MacCulloch, an analyst at Desjardins Securities, wrote after Tamarack Valley’s latest quarterly results in May.
Tidewater Midstream and Infrastructure Ltd.
Since going public in 2015, Tidewater has been busily making acquisitions to establish a portfolio of assets in the processing and transportation of natural gas liquids throughout North America.
The company has also built a decent operational track record in that time, most recently announcing in June the completion of the Pioneer pipeline four months ahead of schedule. The joint venture with TransAlta Corp. connects Tidewater’s natural gas facility in west-central Alberta to TransAlta’s generating stations near Edmonton.
“This milestone demonstrates the company's ability to execute a major project, a key element for multiple expansion, in our view,” CIBC World Markets analyst Robert Catellier said in a note.
The market, however, has not rerated the stock, which trades at a significant discount to its larger midstream peers.
Champion Iron Ltd.
Champion’s acquisition of a Quebec iron-ore play at a steep discount from a bankrupt operator back in 2015 is now looking like a stroke of genius.
Production has ramped up at the same time as iron-ore prices have spiked, which has elevated the company’s cash flow dramatically in recent quarters.
“They’ve been making a boatload of money,” said AGF’s Mr. Imhof, who manages funds that own shares of Champion. “The stock now is a bit of a market darling.”
The stock, however, is highly sensitive to global iron ore prices, which have risen on supply constraints, and may soon be due for a pullback.