Canada's Big Banks Take a Breather: 2 Undervalued Alternatives to Consider

Royal Bank of Canada (TSX: RY) and Toronto-Dominion Bank (TSX: TD), two behemoths in the Canadian stock market, have recently hit a pullback after delivering strong gains. The combined market cap of these two stocks is $670 billion, making up 10% of the TSX Composite Index.

Despite their past performance, investors should be cautious buying these stocks now due to stretched valuations. Both banks are trading with a price-to-earnings (P/E) ratio of 18, substantially above their long-term P/E average of 13. Their dividend yields have also compressed.

Pembina Pipeline (TSX: PPL), on the other hand, offers a higher dividend yield at 4.5%. The company has a market cap of $38.5 billion and is one of the largest diversified energy infrastructure companies in Western Canada. With 89% of its income contracted and a payout ratio of only 57%, Pembina generates excess cash after paying its dividend.

Richards Group (TSX: RIC) is another stock with a low forward P/E ratio of 10, making it an attractive option for investors looking for value. The company has been transforming itself from a packaging distributor to one focused on medical devices and disposables, which are more economically resilient.