This Canadian Growth Stock is Way Undervalued Today

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As the bull market came to an end and stocks began to sell off in late 2021 and early 2022, it wasn’t surprising to see Canadian growth stocks falling significantly in value.

First off, some of the fastest-growing stocks will trade with significant premiums. So when the market environment worsens or investors expect these growth stocks to start seeing headwinds, naturally, their premiums erode, and the stocks fall in value.

However, these changes in market sentiment and, consequently, the valuation of stocks are always temporary. So, the key is to buy the highest-quality stocks on the market while they trade at these ultra-cheap prices.

For example, Aritzia (TSX:ATZ) is an impressive growth stock that has been growing rapidly for years. And in the last three years, its forward price-to-earnings (P/E) ratio has been as low as 19.1 times and as high as 46.1 times.

So the key is to buy high-quality stocks like Aritzia, which have years of growth potential when they trade below their long-term average valuations.

And if you’re looking for stocks to buy now, here’s how cheap Aritzia is and why it’s one of the top Canadian growth stocks to buy and hold for years.

Although Aritzia lowered its guidance, it’s one of the best Canadian growth stocks to buy today

When Aritzia announced its first-quarter earnings for fiscal 2024 earlier this month, results met expectations but were massively overshadowed by a reduction in Aritzia’s fiscal 2024 and 2025 guidance.

Macroeconomic factors caused management to lower its revenue expectations by more than 5%, and already, Aritzia has seen a more than 500 basis point reduction in its gross margin due to cost inflation and a temporary increase in warehousing costs.

This isn’t necessarily surprising, though, given that Aritzia operates in the consumer discretionary sector, and many continue to expect a recession to materialize.

So, while the Canadian growth stock is trading so cheaply, investors have an excellent opportunity to gain exposure.

I already mentioned that in the last three years, Aritzia has had a forward P/E ratio as high as 46.1 times and as low as 19.1 times. And today, it trades at just 23 times forward earnings, right near the bottom of its three-year range and well below its three-year average of 30.6 times.

It’s also worth noting that Aritzia’s earnings are expected to take a temporary dip over the next year. For example, in fiscal 2024, analysts expect its normalized earnings per share (EPS) will be just $0.92, with EPS in fiscal 2025 expected to return to normal at $1.88.

So with Aritzia currently trading just below $25 a share, it trades at just 13.2 times its expected 2025 earnings.

Therefore, investors who take advantage of Aritzia’s temporary headwinds can buy the stock ultra-cheap today and benefit when Aritzia’s business operations recover, as well as when the market environment improves.

Even at its current valuation of 23 times earnings, the stock would rise to more than $43, should Aritzia’s EPS recover to $1.88 as expected in fiscal 2025. And if its valuation returned to its three-year average of 30.6 times, the stock price could climb to more than $57.50.

Therefore, while Aritzia stock is ultra-cheap, it’s easily one of the best Canadian growth stocks you can buy today.

The post This Canadian Growth Stock is Way Undervalued Today appeared first on The Motley Fool Canada.

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See the 5 Stocks
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Fool contributor Daniel Da Costa has positions in Aritzia. The Motley Fool has positions in and recommends Aritzia. The Motley Fool has a disclosure policy.