In a previous piece, I’d stated that Bank of Montreal (TSX:BMO)(NYSE:BMO) was the most expensive Big Five Canadian bank, and that investors should hold off on adding to their stakes. The stock of Bank of Montreal is now down over 11% from its 52-week high as it continues to decline into the abyss.
Bank of Montreal recently released its second-quarter results, which weren’t too bad, but the general public was rather disappointed as the stock plunged 3.3% in a single trading session. Is Bank of Montreal still overvalued? When will the bleeding stop?
Negative reaction to a mixed quarterly earnings release
Bank of Montreal reported adjusted earnings per share of $1.92, which was an 11% increase from the same period last year. Revenue increased 12.5% year over year to $5.74 billion. The results weren’t as bad as the stock price would indicate, and I don’t believe the post-earnings dip was warranted.
The company missed analyst estimates by a single penny, but investors were really concerned about the company’s increase in provisions for credit losses, which surged 28.9% to $259 million. Many investors are still rattled over the turmoil caused by Home Capital Group Inc., and they’re worried that the Canadian housing market may be on the verge of collapse.
I don’t think investors should panic. Canadian banks are fantastic long-term investments, and I believe any systematic risk related to the collapse of Home Capital Group is not as horrifying as the general public makes it out to be.
The fact of the matter is that many great companies that reported mediocre earning have been hit with single-day sell-offs because stocks have run way ahead of reality. Everybody is expecting perfection when it comes to earnings reports of late, and anything that falls short results in a plunging stock price.
Canadian bank stocks were expensive, and a correction was inevitable, but a 2008-style crash is probably not in the books for the big banks. Pessimism regarding the Canadian banks is at a high right now, and if you’re a contrarian investor, it might make sense to start picking up shares on the way down.
Is Bank of Montreal still expensive?
Although Bank of Montreal took a huge plunge, I still think the stock is expensive relative to its peers in the Big Five. The company’s 12.17 price-to-earnings multiple is still considerably higher than its five-year historical average price-to-earnings multiple of 11.4.
If you’re looking to buy Canadian bank stocks on weakness, I’d recommend going for one of the other Big Five banks at this point. I believe they’re all considerably cheaper than Bank of Montreal.
It’s likely that we’ll see more disappointment as the rest of the banks report earnings later in the week. I would buy a chunk following post-earnings sell-offs if they present themselves with the intention of buying more on any further signs of weakness as we head into the latter part of the year.
Canadian banks are terrific long-term plays, but volatility and pessimism are likely to pick up over the short term. Be patient and watch the banks like a hawk, as fantastic entry points could soon be on the horizon.
Stay smart. Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any stocks mentioned.