Expansion-hungry banking institutions are no strangers to the TSX index of late, though Bank of Montreal (TSX:BMO)(NYSE:BMO) hit the headlines this week with an especially ambitious push to gain one million more Canadian personal banking customers, and increase its proportion of U.S.-based earnings to a third. Let’s really pull the data apart for this stock and see whether it’s a buy ahead of this proposed market share conquest.
Is it defensive?
Big stocks are usually a good place to hide when the going gets rough: BMO‘s market cap of $64 billion certainly fits the bill. A one-year past earnings contraction by 9.5% and low five-year average past earnings growth of 5% doesn’t sound fantastic, but BMO stock hits nice and steady with a low PEG of 1.1 times growth and an acceptable proportion of non-loan assets.
A considerable volume of shares was inside-sold in the last three months, while no inside buying data is visible for the past 12-month period; competitors include the rest of the Big Five banks, so this ticker is in good company. So far so good – now let’s see if it’s a buy.
This Big Five stock is good value today
Buying stock in BMO today will lock in value that is confirmed by a raft of decent multiples, such as a P/E of 13.3 times earnings and P/B of 1.6 times book. Using a stock screening technique I put together over the summer, I sometimes throw in a stocks dividend yield to round out its valuation for long-term passive income investment purposed; today’s price for BMO stock will return a yield of 3.88%.
In terms of quality, BMO had a ROE of 11% last year, and its most recent EPS was a decent $7.3. A 12.6% expected annual growth in earnings goes into the pot to make a tasty quality stock. Momentum is a bit mixed for BMO stock at present, and is skewed by the multi-channel October sell-off: it shed 4.66% in the last five days, though its beta of 0.88 indicates low volatility, and its share price is discounted by 9% compared to its future cash flow value.
Is BMO stock a buy, hold, or sell?
It’s possible to calculate a percentage using the three factors of value, quality, and momentum. Good price-per-earnings and price-per-book value ratios give a strong result here, while that dividend is acceptable and defensive. Quality is let down a little by that mediocre ROE, while momentum is brought up by that sudden drop in share price. Altogether, a quick calculation using a 33%-per-factor weighting gives 59% overall: only a moderate buy.
The bottom line
Putting this stock through a screening tool came back with some interesting findings: I would have expected BMO to be a stronger buy, but a lack of volatility and low ROE let the side down. Oddly, a drop in share price is probably what tipped the balance toward a buy signal. This shows that using momentum as a buy/sell indicator can be misleading – or rather, that market-wide selloffs can skew data and make stocks look more (or less) attractive than they should be.
Iain Butler has stumbled upon a little-owned stock he believes could be one of the greatest discoveries of his almost 20 years as a professional investor.
This is your chance to get in early on of what could prove to be a very special investment recommendation. Think about how many investing trends you've missed out on, even though you knew they were going to be big. Don't let that happen again.
Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.