FRU:CC - Freehold Royalties Stock Is Down 12% in 2023: Buy Now or Avoid?
2023-12-13 20:15:00 ET
After another year of significant economic headwinds and more interest rate increases, there are plenty of high-quality stocks for Canadian investors to buy on the dip today. For example, Freehold Royalties ( TSX:FRU ), a high-quality energy stock, has sold off so much that it now offers a yield of more than 8.3%.
This is not uncommon to see in this environment. Dividend stocks have lost value and seen their yields rise as a result of rising interest rates and, consequently, rising bond yields.
In addition, even many non-dividend paying stocks have seen their share prices impacted significantly, as higher interest rates cause debt to become more expensive to service, ultimately hurting many companies’ profitability.
Therefore, because so many stocks are trading cheaply now, this is the perfect opportunity to buy stocks today that you can hold for the long haul .
It’s essential, though, that you don’t just buy a stock because it’s undervalued or because it looks like one of the cheapest stocks on the market.
It’s far more important to ensure the company you’re looking at is a high-quality business before looking to see how undervalued it is.
Buying stocks while they’re undervalued is ideal, but only if they have the quality to not only recover in the near term when the economy finally turns around but also have the potential to continue expanding their operations and increasing shareholder value for years after this environment is finally over.
So, with that in mind, although there are certainly numerous stocks to choose from, here’s why Freehold Royalties is one of the top stocks to buy now, especially while it trades so cheaply.
Why is Freehold one of the top stocks to buy now?
The energy sector is an interesting one to consider when looking for stocks because it’s highly essential and one of the most important industries in the economy. Without energy, the economy will grind to a halt.
At the same time, though, energy prices are highly volatile, causing many energy stocks to become volatile.
In Freehold’s case, the stock is one of the most impressive in the energy industry. It has an impressive business model, its balance sheet is in great shape, it continues to expand its business, and its significant dividend is kept at a sustainable payout ratio.
However, because there is the expectation of a recession in the near term and because energy prices have been falling as a result, Freehold stock has lost over 10% this year and, in total, is down by roughly 20% from its all-time high.
Therefore, this temporary discount in its market price has created an excellent opportunity for investors to buy Freehold undervalued.
Right now, the stock is trading below $13 per share. Meanwhile, analysts expect it will earn between $1.55 and $1.60 in free cash flow per share this year and in 2024.
That gives Freehold stock a current forward price to free cash flow ratio of just 8.2 times. That’s below its three-, five-, and 10-year averages.
In addition to the value Freehold offers, it’s also an ideal long-term investment
With Freehold trading so cheaply, offering a compelling yield and continuing to expand its business, it’s easily one of the best stocks to buy now.
Just this week, the energy stock acquired more land south of the border, which is expected to drive a roughly 5% increase in free cash flow per share going forward. Plus, because the company had essentially no net debt going into the acquisition, it could easily fund the purchase without putting any stress on its balance sheet.
With the roughly 8.3% dividend yield Freehold offers, investors can buy the stock now and afford to wait for its recovery, even if it takes longer for Freehold and the rest of the economy to recover.
I mentioned above that Freehold is expected to earn free cash flow per share of nearly $1.60 this year. Yet, right now, the stock pays out just $1.08 per year annually, showing just how much margin of safety the dividend has.
So, if you’re looking to take advantage of the current environment and buy stocks on the dip, Freehold is easily one of the best to consider today.
The post Freehold Royalties Stock Is Down 12% in 2023: Buy Now or Avoid? appeared first on The Motley Fool Canada .
Fool contributor Daniel Da Costa has positions in Freehold Royalties. The Motley Fool recommends Freehold Royalties. The Motley Fool has a disclosure policy .
2023