The Top 3 Overlooked Canadian Stocks with Great Potential

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A tough market has dragged down several Canadian stocks that were already struggling, pushing some into deep value territory. Over the past year, cannabis firm Curaleaf CURA has lost nearly 75%, miner Lithium Americas LAC 30%, and recreational vehicle maker Bombardier Recreational Products DOO 35%.

These three undervalued stocks are now in 5-star territory, as the new year has yet to reverse their fortunes. In the year to date, they have fallen 5%-15%, continuing to underperform the Morningstar Canada Index’s gain of over 3% as of Feb 25.

Curaleaf appears to have lost some of the buzz it generated with the legalization of cannabis in Canada and the United States. Lithium America and BRP have also faced bumpy rides, weighed down by developmental and macroeconomic headwinds.

For this article, we screened Canadian-listed stocks covered by Morningstar analysts, ranked them based on their price/fair value ratios, and identified the three most undervalued opportunities.

The cheapest name is Curaleaf, which cultivates and sells recreational and medicinal cannabis in the US, with a presence in 17 states, including Arizona, Florida, Illinois, Massachusetts, New Jersey, New York, and Pennsylvania.

“The US market has the highest total potential and offers the largest growth of any market,” says Morningstar equity strategist Kristoffer Inton. However, he cautions that “the regulatory environment is murky, with recreational or medical cannabis legalized in individual states while remaining illegal federally.”

The company has been facing multiple headwinds, including a resilient illicit cannabis market, price compression, slower incremental state legalization, and cost of capital, all of which have underpinned the stock’s poor performance over the past year. This has prompted Inton to lower the stock’s fair value estimate to C$6.50 per share and cut his 10-year average annual growth rate forecast to 6% and mid-cycle adjusted EBITDA margin to 32%.

Lithium America relies singularly on its Thacker Pass lithium project in Nevada. The company’s only resource, the project is currently in construction, with production planned for several years into the future. The miner will own 62% of the project, while automaker General Motors will own the remaining 38%.

Morningstar strategist Seth Goldstein recently lowered the stock’s fair value to C$11.50, prompted by his “forecast for lower long-term production at Thacker Pass.” The company faces its biggest risk in project execution. “This includes finishing construction on time and budget, ramping up volumes, and producing battery-quality product,” he notes.

Headquartered in Quebec, the third most undervalued name is BRP. The recreational vehicle maker saw a 26% decline in 2024 sales. However, Morningstar equity analyst Jaime Katz forecasts average sales growth of 3.4%, outpacing industry retail sales, which are projected to be up less than 1% through 2028, largely affected by weak near-term demand. Katz thinks the dealer demand weakness seen over the past year may persist over the next few quarters, but adds that “this is a function of higher borrowing costs.”

BRP’s continued focus on its long-term product innovation and operational priorities will allow it to maintain its wide moat. Katz recently lowered the stock’s fair value estimate to C$103 after incorporating its recent results and the updated foreign exchange rate.

Curaleaf

“We think the US market has the highest total potential and offers the largest growth of any market. But the regulatory environment is murky, with recreational or medical cannabis legalized in individual states while remaining illegal federally. However, we expect federal law will be changed to recognize states’ decisions on cannabis legality, though timing around that growth will be bumpy, given the pace of state legalization.

“Curaleaf has also made acquisitions that give it exposure to serve the potentially lucrative European market, competing with major Canadian cannabis cultivators and a unique feature among US multistate operators. Exporters must pass strict regulations to enter markets, which protects early entrants like the Canadian companies. With the recent legalization of adult-use in Germany, we think Curaleaf is positioned to benefit.”

Read more of Kristopher Inton’s take on Curaleaf here.

Curaleaf Stock vs. Morningstar Fair Value Estimate

Source: Morningstar Direct. Data as of Feb. 26, 2025.

Lithium Americas

“Lithium Americas aims to become a pure-play lithium producer. Upon entering production, [the company’s only resource] Thacker Pass would become the first clay-based lithium resource in the world. Thacker Pass is planned as a large-scale lithium production site. Management targets 160,000 metric tons of annual capacity to be built in four phases. Each phase will add 40,000 metric tons of annual capacity.

“As electric vehicle adoption increases, we expect double-digit annual growth for lithium demand. Lithium Americas should benefit, as there should be more than enough demand for its three resources to enter production and expand capacity over time.”

Seth Goldstein’s commentary on Lithium Americas can be found here.

Lithium Americas Stock vs. Morningstar Fair Value Estimate

Source: Morningstar Direct. Data as of Feb. 26, 2025.

Bombardier Recreational Products

“As evidence of BRP’s brand prowess, we look to its ability to capture industry leading market share. We posit much of the brand staying power is contingent upon perpetual spending on research and development to ensure the firm has a pipeline of compelling new products to entice its addressable market. We surmise BRP will spend 4%-5% on sales over the next five years on such efforts, which represents about C$370 million annually. Such efforts have allowed BRP to hold a solid leadership position (30% market share in side by sides) in the off-road market, alongside companies like Polaris and Honda (year-round products, including ATVs, constituted 52% of fiscal 2024 sales).

“Despite industry competition, BRP has been implementing steps to lift long-term operating margins to 12% from the high single digits historically (the metric bumped to more than 15.5% in fiscal 2022 as a result of robust demand—which has already normalized). With solid cash flow generation ahead, we expect BRP will reinvest in product innovation, facilitate share repurchases, and increase its dividend over time. BRP has historically generated ROICs above our weighted average cost of capital assumption (9%) and should be able to achieve average ROICs including goodwill of 15% over the next decade.”

Read more of what Jamie Katz has to say about BRP.