Joey Frenette: Canadian Imperial Bank of Commerce
Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) shares have been clobbered a good one in May thanks in part to abysmal second-quarter earnings that confirmed the credit cycle fears of many investors.
The short-sellers were right to bet against CIBC thus far, as the bank did appear quite “ill-prepared” given the pop in provision for credit losses (PCLs) and expenses, two sore spots in the second-quarter that sent shares tumbling over 7% in the two subsequent trading sessions.
One man’s trash is another man’s treasure?
I believe there’s significant value to be had in CIBC after the post-earnings plunge. There’s no sugar-coating the rancid quarter, and things could certainly get worse, but I’m not buying the “Big Short Canada” doomsday scenario that may be the thesis of some of the more pessimistic short-sellers out there.
Shares are less than 4% from entering to correction territory (20% peak-to-trough drop), and if I were to guess, I’d say the damage will be capped to around 20% because at this juncture, it looks to most frightened of investors have already had their chance to run. All that’s left? Long-term thinkers that are bullish on the long-term thesis and wouldn’t mind enduring a little more credit deterioration for a bit more yield.
At the time of writing, CIBC sports an above-average 5.4% yield, together with a valuation that I think more than makes up for the weak near-term outlook. The stock trades at 8.6 times forward earnings and just 1.3 times book.
If that’s not cheap, I don’t know what is.
Fool contributor Joey Frenette owns shares of Canadian Imperial Bank of Commerce.
