It’s never easy to go against the grain as an investor. Being a contrarian sounds easy on paper, but when the tides get rough, it’s really tough to cast a line into the waters. With the Canadian economy facing a potential recession later this year, questions linger as to what the fate of broader stock markets will be. Depending on who you ask, the coming economic contraction is expected to be shallow, short-lived, or mild. Does that entail a steep drop in valuations? It’s difficult to tell. Regardless, investors with liquidity don’t need to make any rash decisions today.
There are stocks on the TSX Index that have already taken a beating. And it’s these names that may be better inclined to hold up, as a recession and other industry headwinds already seem to have chipped away at multiples.
In this piece, we’ll look at one hard-hit Canadian bank stock that I believe has fallen too hard over the past year or so. Though it could take a while longer for them to come roaring back, I think investors with a long-term horizon (three to five years or more) will stick around long enough to be there for a share price recovery.
There’s still quite a bit of pressure on each name, though. So, do have a game plan if shares continue to tumble after you’ve purchased. Whether you look to implement a dollar-cost averaging (DCA) approach, diversify, or hedge, investors should understand the risks of jumping into any deep-value stock. Even if you’re right about the value to be had in a stock, it can take a long time before the market realizes it’s underpriced a name.
Bank of Montreal
Bank of Montreal (TSX:BMO) is in the middle of a pretty ugly bear market right now. The stock’s off around 23% from its 2022 high. At this juncture, it appears the U.S. regional banking woes have already added a weight to the shoulder of Canada’s top-tier bank. BMO’s been expanding into the U.S. market over the years to bolster its growth profile.
In February, the firm closed its acquisition of a U.S. regional bank named Bank of the West. The deal cost US$16.3 billion. That’s a pretty penny. Looking back, I think it’s safe to say BMO probably should have waited a bit before committing to such a sizeable deal. The timing looks quite brutal, given the close came around a month before SVB Financial caused the U.S. regionals to sink lower.
BMO can’t go back on the deal. It’s in the books.
In any case, I think BMO has already been punished accordingly. At less than 7.5 times trailing price to earnings, BMO stock looks incredibly undervalued. Despite its growing exposure to U.S. regionals, I’m still a fan of the price. Further, BMO is incredibly well capitalized and can help Bank of the West sail through the rest of the regional banking crisis.
The bottom line
The U.S. regional banks got rocked. It’s unclear when the turmoil will end. Regardless, I think BMO could escape its bearish rut once things begin to settle, whether it takes another month or a few quarters for jittery depositors south of the border to calm down. Given BMO’s rich history of dividend growth, I’d be inclined to buy the dip. However, I acknowledge that it could take time before the tides turn.
