Bargain stocks can offer a margin of safety with markets reaching record highs.Adam Smigielski/iStockPhoto / Getty Images
Investors may be getting jittery as stock markets trade close to record highs, uncertainty hangs over the U.S.-Iran peace talks and concerns grow about interest rate hikes to curb inflation.
Given these worries, it may be time to look at bargain stocks that can offer a margin of safety. They may have missed analyst expectations or been hurt by market volatility or investor impatience.
Globe Advisor asked three hedge fund managers for their top picks among what they view as undervalued stocks.
Rick Ummat, co-chief investment officer and portfolio manager, Jemekk Capital Management Inc. in Toronto
His fund: Jemekk Long/Short Fund
The pick: CareRx Corp. CRRX-T
This Toronto-based supplier of pharmacy services to seniors is an attractive investment because of its growth-by-acquisition strategy, Mr. Ummat says. CareRx serves long-term care, retirement and assisted-living facilities. Its stock is off sharply from a 52-week high of $4 a share, but “there is nothing fundamental for this drawdown,” he says.
CareRx, which has a clean balance sheet, could make a meaningful acquisition in the next three to six months, he adds. Its stock recently traded at about eight times 2026 earnings before interest, taxes, depreciation and amortization (EBITDA) versus 22 times for its U.S. peer, Guardian Pharmacy Services Inc. GRDN-N. Both have similar EBITDA margins, he notes.
Risks for CareRx include management failing to integrate acquisitions successfully and governments cutting seniors’ drug programs.
The pick: NeuPath Health Inc. NPTH-X
This operator of medical clinics focused on chronic pain and sports-related injuries is under the radar, but its stock should garner more interest as it makes acquisitions, Mr. Ummat says. Mississauga-based NeuPath Health, which operates in Ontario and Alberta, plans to expand nationally in a fragmented industry of smaller players, he notes.
“This micro-cap stock has been trading attractively at about five times 2026 EBITDA,” he says.
NeuPath has a clean and underutilized balance sheet for a major acquisition that could occur as early as the next three to six months, Mr. Ummat says. He adds that the company’s chief executive officer, Stephen Lemieux, has been buying NeuPath stock, which signals how undervalued the shares are.
A risk is management’s failure to acquire a company that would increase earnings per share.
Travis Dowle, president and portfolio manager, Maxam Capital Management Ltd. in Vancouver
The fund: Maxam Diversified Strategies Fund
The pick: Premium Brand Holdings Corp. PBH-T
Premium Brand Holdings’ stock is down about 30 per cent over five years, but there are catalysts for a rebound, Mr. Dowle says. Shares of the Richmond, B.C.-based manufacturer and distributor of specialty and premium food products have suffered in part due to concerns about food inflation and its use of leverage, he says.
One catalyst is its emergence from a multi-year capital expansion cycle in which it invested more than $1-billion to create roughly $2-billion of incremental sales-production capacity, he adds. Rising revenue and cash flow should flow to the bottom line, he adds.
The company also expects to shed non-core assets to reduce debt, he says, and its stock trades cheaply at about 9 times enterprise value (EV) to expected 2026 EBITDA.
The risk is that management fails to execute its strategy effectively.
The pick: VitalHub Corp. VHI-T
Shares of the Toronto-based provider of mission-critical software tools for the health care and human services sectors are down sharply over the past year, but there are catalysts for a rebound, Mr. Dowle says.
The pullback in VitalHub’s stock is due partly to the perception that artificial intelligence will impact its business, he says. These fears are overblown, he argues, adding that this stock is attractive because of “sticky recurring revenue, high gross margins, profitability and an acquisition-growth strategy.”
More accretive acquisitions, organic growth and margin expansion are potential catalysts for future gains, he says, and VitalHub trades attractively at about 10 times EV to expected 2026 EBITDA.
Slowing accretive acquisitions and organic growth are risks, but VitalHub’s sizeable net cash position mitigates that, he adds.
Jordan McNamee, founder and chief investment officer, Optimist Fund in Toronto
The fund: Optimist Fund
The pick: Wayfair Inc. W-N
Shares of the Boston-based online furniture retailer have been dead money for four years but are turning the corner, Mr. McNamee says.
Wayfair’s stock suffered amid rising interest rates that hurt the housing market as well as slowing consumer spending recently amid the Iran war, he adds. In the first quarter, revenue grew almost 8 per cent over a year ago, but Wayfair should return to 20-per-cent revenue growth that will result in strong profits, he says.
Catalysts for this stock include more brick-and-mortar stores that will also help the online business, an end to the Iran war and lower interest rates in the future, he adds. Its stock is compelling, “given that our target price is US $350 a share in three years, at which point, it would trade at 35 times forward earnings per share,” he says.
The risk is a weak housing market.
The pick: Carvana Co. Cl A CVNA-N
Carvana’s stock is off sharply this year, but the online used car retailer has catalysts to drive it higher, Mr. McNamee says. The Tempe, Ariz.-based company, which staved off bankruptcy in 2022, saw its stock hit a record high of US$97 a share on a split-adjusted basis in January.
“It has grown the amount of retail cars they sell by 40 per cent for six quarters,” he notes. “Continuing to grow 35 per cent or more … is the catalyst, and we believe they can do it.”
Carvana has 2 per cent of the U.S. used car market but is aiming for 7.5 per cent in five to 10 years. Growth will also come from buying more new car dealerships and selling new cars online, he adds.
Its stock is attractive because “our target is US$260 [a share] in three years, at which time it would trade at 35 times forward earnings per share,” he says. The risk is poor execution of Carvana’s strategy.