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 Royal Bank Of Canada (NYSE:RY) 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).
An investment banker in a power suit entering an exclusive board room with a confident stride.
Royal Bank Of Canada (NYSE:RY)
Number of Hedge Fund Investors: 21
Forward P/E Ratio as of September 25: 13.92
Royal Bank Of Canada (NYSE:RY) is the largest financial institution in Canada by market capitalization. The bank provides various financial products and services, including personal and commercial banking, wealth management, and investment banking. Royal Bank Of Canada (NYSE:RY) has a robust international presence, particularly in the U.S. and Caribbean, and continues to grow through strategic acquisitions and digital innovation in financial services.
Royal Bank Of Canada (NYSE:RY) focuses on earning interest income from loans and deposits, as well as fees from asset management and other services. The company’s mortgages are highly regulated. This has resulted in a portfolio with a high percentage of prime mortgages, with 83% of mortgages having a FICO score above 720. Furthermore, the Canadian housing market is supported by strong population growth and limited supply, which should continue to drive demand for housing and support the bank’s mortgage business.
In March, Royal Bank Of Canada (NYSE:RY) acquired HSBC Canada which is poised to expand its footprint in Canada significantly. The company’s wealth management business is also a key driver of growth, with assets under administration increasing by 15% year-over-year. With its strong brand, extensive network, and commitment to innovation, Royal Bank Of Canada (NYSE:RY) is well-positioned to continue to grow its market share and deliver strong returns to shareholders. The company’s stock is trading at a forward PE of 13.92. Analysts forecast the company to increase its earnings by 5.79% this year. As of the second quarter, the stock is held by 21 hedge funds, and the stakes amount to $143.93 million. D E Shaw is the largest shareholder in the company and owns stocks worth $34.86 million as of June 30.
Overall RY ranks 4th on our list of the undervalued Canadian stocks to buy. While we acknowledge the potential of RY 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 RY 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.