Ready or not, interest rates are poised to rise in 2022, but Canadian investors need not fear, especially if their portfolio is adequately diversified. Undoubtedly, 2021 served as a lesson for many beginner investors who may have been found guilty of chasing top-performing growth stocks.
Moving into 2022, the TSX Index looks in great shape to finally outpace the S&P 500 for the first time in a long time.
Why?
The TSX is light on tech, which has faced a bit of weakness in recent months as a result of higher rates. A heaviness in financials, energy and materials could finally work in the Canadian index’s favour, as rates finally push a rotation into classic value names, rather than the sexiest of tech stocks with zero in the way of earnings.
Energy stock received a major boost in 2021, propelling the TSX subtly higher on the year. But it’s financials, led by Canadian banks, that could have room to run. Many of the incredibly well run Canadian banking giants are priced at a ridiculously low multiple, given the more favourable environment that lies ahead.
Banks have been stuck in a bit of a rut over the past several years, thanks in part to rock-bottom rates, COVID-induced pressures, and subtle weakness in credit. Things are about to change. Higher rates tend to accompany a pick up in economic activity, both of which could be a massive boon for the banks as they look to enter a potential multi-year bull market of their own.
Could the Canadian bank stocks be unstoppable in 2022?
Only time will tell, but the fundamentals, I believe, do seem to be getting better with time. While you could do well with almost any bank stock here, I do think Bank of Montreal (TSX:BMO)(NYSE:BMO) is quickly becoming one of my favourites for those looking to buy and hold for the next 10 years. Sure, the dividend yield isn’t the most impressive of the Big Six batch. That said, I do think that investors should focus on more than just yield. They should focus on the growth and dividend growth potential.
Bank of Montreal
Bank of Montreal really flexed its muscles in its latest round of earnings. The bank hiked its dividend by a jaw-dropping 25% alongside a generous share buyback program. Indeed, management is incredibly bullish on its future. The commercial and retail-centric bank with U.S. and Canadian exposure is in great shape to profit as rates rise.
The recent acquisition of Bank of the West in a deal worth $17 billion was also quite remarkable. Though the deal was met with mixed reactions, I do think that such a bank could really thrive under BMO’s competent managers. If we are at the cusp of a multi-year banking bull market, BMO’s big acquisition could prove its doubters wrong come five years from now. In any case, investors shouldn’t ignore the recent strength out of the bank after its latest hat trick of a big dividend raise, earnings beat, and acquisition.
At writing, BMO trades at 11.7 times trailing earnings alongside a 3.92% dividend yield. Given BMO’s superior growth prospects, I find the valuation to be absurdly low ahead of what could be a very prosperous environment.
