• The latest market drop did not create amazing opportunity because it only dropped five percent.
• However, there are companies that have decreased to double-digits for a while during this bull market.
• Here are two of my favorite Canadian stocks that are deeply undervalued.

I am not going to tell you that the market dropped like a rock last week or that there are “stocks on sale” due to the latest drop. You have already been submerged by those kind of stories already, right? In fact, I want to talk about companies that have been deeply suffering for a while now. You may think the TSX is on sale right now, but in fact, it is only down five percent. Would you rush into the store if Boxing Day could get you five percent off of your next TV?

Source : Ycharts

I am talking about real stocks on sale that are deeply discounted.

For reasons I cannot explain, Canadian stocks, especially dividend ones, are completely ignored right now. Great companies that I found overvalued, or fairly priced at best, are now on deep discount. The worst part is that everybody is passing by the shelves and leaving them there. Halloween is in two weeks and if you sit tight, you will get spooked by stocks falling faster than kids eating candy. I have a few suggestions for the most courageous.

Cineplex (CGX.TO); a Horror Movie

Cineplex is Canada’s largest movie theatre operator with a huge market share of seventy-eight percent. Including one hundred sixty-four theatres with one thousand one hundred sixty-seven screens. With the rise of home theatre, we would have thought that the classic cinema date would become outdated. However, Cineplex was able to improve consumers experience with various combo offers, games, and VIP treatments.

As Cineplex evolved its business model toward more premium services, it enjoys not only a huge market share, but is able to generate interesting margins. Cineplex is also in line with a successful online streaming platform. Finally, CGX is gradually building a serious bond with its clients through SCENE loyalty program. From six hundred thousand members in 2006, SCENE now counts almost eight million members.

Potential Risks

A poor movie line-up, minimum wages going up to fifteen dollars an hour, and difficulties to convince the market its business model will thrive in the future; this is what is happening recently around Cineplex. Cineplex is highly dependent on what Hollywood puts on screen for our entertainment pleasure.  2017 was a horrible year in term of blockbusters and CGX paid the consequences. With minimum wages rising everywhere and massive reinvestment needed (in new concepts such as the REC room), margins may also get hurt.

Dividend Growth Perspective

CGX has the advantage of paying a monthly dividend around five percent, which is great for income seeking investors. On top of that, CGX pays its distribution monthly. While the market feared a dividend cut, the movie giant offered investors a pay raise of 3.57% a few months ago.

Management remains cautious about its payout and I have reduced our dividend growth perspective accordingly (2% for the next 10 years).Considering its current yield, I think CGX is a great pick as its distribution will follow inflation.  A strong leadership presence and steady income should be enough to reward shareholders.

What Will Happen Going Forward

I believe that this dominant player in the movie theatre business in Canada will continue to thrive. For a moment, investors did not believe in my investment thesis and the stock plummeted. 2017 was a terrible year in the movie industry with a lack of blockbusters and poor overall attendance.  However, this summer, CGX reassured the market with EPS up from $0.02 to $0.38 and revenue growth of +12.4% ($409M).

Source: Ycharts

CGX finally posted a great quarter and shares surged back to $30 and up. Strong revenue growth was supported by higher attendance (+5%), stronger box office per patron (+4.4%) and higher concession revenues per patron (+9.3%). Free cash flow surged by 142% providing more room for management to support its dividend. After reading this, one should understand why CGX increased its dividend last month. New Rec Rooms are also bringing additional diversification and strength to the Cineplex business model.

BCE (BCE.TO): Will it let you hang yourself in there?

BCE is the largest Canadian telecom by market cap and about twice the size of Telus. It shows the most balanced business model among this small group. BCE has shown a very solid dividend profile for several years and my analysis proves it will continue to rise in the future. All BCE services are based on some sort of monthly subscription, generating a consistent base for cash flow.

When you have the possibility to invest in a strong yielder like BCE and still hope for a small stock appreciation growth, you must take a hold of it. BCE shows a well-diversified business model and will continue to generate strong cash flow in the future. The company is a real money printing machine. As BCE is part of an oligopoly (Telus, Rogers and BCE controls about 90% of wireless market), there is limited competition and high barriers to entry. Since BCE offers a wide array of products, it can increase revenue generated by each customer.

Source: Ycharts

Potential Risks

BCE debt level is not be underestimated.  BCE is a giant with a giant debt. That giant debt is sometimes compared to a $24.1B tab at the bar. While BCE debt to equity ratio is lower than its peers (1.18 for BCE vs 1.47 for Telus (T.TO) and 2.17 for Rogers Communications (RCI.B.TO)), the dollar is a lot higher ($14.26B for Telus and $16.19B for Rogers). This is not a perfect situation as interest rates are now rising.

As the Canadian Government keeps pushing for more competition in the wireless industry, BCE may see additional competitors adding more pressure on margins in the future. One day or another, a major player will take its chance in the Canadian market and price will fall (good for customers, bad for BCE!). The simple mention of Verizon pushed the stock down a few years ago.

Dividend Growth Perspective

Management maintained a high, but under control, payout ratio over the past 10 years. BCE’s current payout ratio is at 96%, but its cash payout ratio is at 82%. Considering BCE is a real money-making machine, those ratios are manageable.

While distribution increased steadily since 2010, the payout ratio did not move much. BCE should remain cautious, but there is room for dividend growth. BCE is probably the best compromise for an income seeker. While its stock is relatively stable, shareholders enjoy a steady yield. Since payment is secure, BCE falls into the “buy and sleep” stock.