We’re fundamentalists here at the Motley Fool, but that doesn’t mean Foolish investors should shun technical analysis entirely. While many “serious” investors scoff at the idea of looking to past price data to determine where a stock’s headed over the near term, I’m in the belief that it can’t hurt to use technicals as one of many tools in your investment analysis arsenal.
Technical patterns can be abused by various beginner investors, but so too can the use of traditional valuation metrics like the price-to-earnings ratio. The P/E ratio is one metric that ought to be supplemented with a plethora of others, in addition to an analysis of the industry, a company’s management, and the long-term growth trajectory.
That’s a lot of homework to do! But it’s worth it.
Whenever you have a stock of a company that’s fundamentally sound and seemingly undervalued, it can’t hurt to take a gander at the technicals. If you’re in luck, you could have a stock that’s both technically and fundamentally sound — a signal that the stock you’re looking at is a screaming buy.
Consider CIBC (TSX: CM)(NYSE: CM), a Big Five bank that’s been under a tremendous amount of pressure in recent months thanks to industry headwinds that the Big Banks haven’t seen in quite some time.
Short-sellers helped exaggerate the downturn such that now CIBC has the highest yield (currently at 5.6%) it’s had since coming out of the Financial Crisis. The perennially cheap stock is also that much cheaper, providing deep-value income investors with an opportunity to lock-in a slightly higher-than-average dividend yield to go with the potential for above-average capital appreciation.
The compelling dividend recently received a modest 6% hike following the release of some better-than-feared third-quarter results. While the results were nothing to write home about, it was notable that key credit metrics showed signs of stabilization.
With expectations so ridiculously low, I do see substantial upside for CIBC stock over the next year despite the meagre industry outlook. The bank will continue chugging along as the credit cycle matures, and if provisions don’t accelerate again, the doomsday scenario the shorts have been touting may lose credibility with investors.
Technically speaking, CIBC stock looks sound
In prior pieces, I noted that CIBC had hit a strong level of support at around $100, also encouraging investors to buy the stock before its Q3 earnings as shares retreated slightly below this critical mark.
Today, shares have bounced off the support level by nearly 4%, and as pessimism gradually fades, I believe that CIBC has much more room to rally. Another quarter of better-than-feared results could cause investors to realize just how undervalued the name is and the next thing you know, the shorts will be feeling the squeeze.
Stay hungry. Stay Foolish.
