Written by Robin Brown at The Motley Fool Canada
Buying TSX stocks when they are beaten up and cheap can seem like the easiest and smartest thing in hindsight. However, when you are in the heat of a market downdraft, it can seem like insanity.
It never feels good to buy TSX stocks when their cheap
Yet, the great Warren Buffett warned investors that, “You pay a very high price in the stock market for a cheery consensus.” In fact, sometimes the best returns over the long term are from buying stocks when they are beaten, under-appreciated, and not “cheery.”
The key is to look for stocks with fundamentally strong business models but might be experiencing short-term business or market weakness. We might be in one of those periods of market dislocation right now. Here’s three remarkably cheap TSX stocks to consider looking at right now.
A cheap communication software stock
Enghouse Systems (TSX:ENGH) has been a pretty good performer over the past 10 years. Its stock has delivered a solid 10.5% compounded annual growth rate (CAGR) over that time (a 173% total return).
Recent performance has been quite disappointing. The company saw a massive surge in revenues and cash from its virtual communications platform during the pandemic. As that demand waned, so did its revenues.
Yet, this company continues to be exceptionally profitable. It generates around $100 million of spare cash per year. It has a spotless balance sheet with $250 million of net cash. It has traditionally grown by acquisitions.
With tech valuations rapidly declining (and many in the communication segment falling into distress), Enghouse could have a large opportunity to deploy that cash into accretive acquisitions.
In the meantime, it trades for only 15 times free cash flow (below its 10-year average of 19) and it has an attractive dividend yield of 2.7% today.
A micro-cap stock at a bargain
Sylogist provides specialized enterprise software solutions for the public education, municipal, and charity segments. These sectors require very specialized solutions. Fortunately, Sylogist has some of the best offerings in the market.
However, the company was mismanaged for several years. With a new CEO and management team, it is working hard towards a turnaround in growth and profitability. Recent quarters have demonstrated improving organic growth, customer wins, and stabilizing profitability.
This stock is not for the faint of heart. However, it only trades with an EV/EBITDA ratio (enterprise value-to-earnings before interest taxes depreciation and amortization) of 10, which is almost a third the value of other peers in its space.
A TSX stalwart for steady stock returns
On an absolute basis, Canadian National Railway (TSX:CNR) is not cheap. This TSX stock trades at 18 times earnings, which is below its five-year average of 20.9 and its 10-year average of 19.7.
Yet, it is not often that you get to buy this TSX stock at a discount to its average. Likewise, it trades with a relatively attractive 2.2% dividend yield.
CNR has faced many challenges in 2023. Results have not been as good as expected due to a slowing economy, numerous strikes, and environmental/weather issues.
Despite them, CN still operates one of the predominant transportation lines in Canada and the U.S. Its economic moat is hard to compete with and impossible to replicate.
Over long periods, this company has incredible pricing power. The fact that it has grown annual earnings per share and dividends per share by a respective 9.3% and 14.6% compounded rate is a testament of this.
Before you consider Canadian National Railway, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in October 2023... and Canadian National Railway wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 25 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 10/10/23
Fool contributor Robin Brown has positions in Enghouse Systems. The Motley Fool has positions in and recommends Enghouse Systems and Sylogist. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.