The Motley Fool

Canadians: Be Cautious With This Stock

Image source: Getty Images

If you haven’t taken at least a little bit of profit off of the table, now is as good a time as any to do so. The recent sell-off has been quite concentrated in tech, and I think there’s a chance that it could spread into the value scene. Undoubtedly, the S&P 500 and TSX Index looks overdue for a correction. While one is always around the corner, it’s notoriously difficult to pinpoint when stocks will drop 10% or more.

Timing the market is a foolish (that’s a lower-case f) endeavour. But taking profits off companies that have seen their prices exceed your estimate of its intrinsic value range is only prudent. If there’s no value to be had, it’s time to part ways, at least with a partial trimming of your position in an overvalued stock.

In this piece, we’ll look at one Canadian stock that’s currently commanding a price that’s well above my personal price target. I’d be uncomfortable holding the stock at current levels.

That said, your estimate of the stock’s intrinsic value may still be higher than mine. And if that’s the case, it may make more sense to hold onto your shares or even purchase more. I’m not right all the time. No investor is.

In a tough spot

In any case, let’s get into a stock that I believe is overvalued according to my personal financial models. Enter IGM Financial (TSX:IGM), a wealth management player that could realistically sink 10-15% over the coming weeks and months.

I’ve never been a fan of the non-bank wealth managers in today’s era of self-guided investing. Mutual funds and other high-fee products are on their way out, and while IGM Financial has done a great job of rolling with the punches, I still think the company could find itself sinking at the hands of the big banks.

You see, the big banks are easily able to upsell their existing clientele without having to spend excessive amounts on marketing campaigns. IGM may have some brand equity behind Investors Group, MacKenzie, and all the sort, but I don’t think they’ll fare well against the big banks, as they continue pushing into the wealth management space.

IGM found itself on the wrong side of a secular decline, and not even investment in fintech, I believe, will be able to prevent a decline in assets under management over the extremely long term. Of course, I could be wrong, but I personally wouldn’t want to bet on the firm, especially at these heights.

The stock trades at 11 times trailing earnings. It’s pretty cheap. But not cheap enough, given I think the firm could be at risk of losing share over the coming years. I’d steer clear and would rather stand alongside a big bank, especially Royal Bank of Canada, which has done well with its wealth management segment in 2020.

Technically unsound

To enhance my bearish thesis further, I’d like to bring your attention to an ominous (and timely) technical pattern that could come to fruition over the near term. The stock appears to have formed a bearish symmetrical continuation triangle, implying a mild correction to around $31.

If you're looking for opportunities in this uncertain market, I'd encourage you to consider the following:

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.