The banking scene has been dealt a tough hand this year, with the failure of SVB Financial (Silicon Valley Bank) back in March. Despite the volatility in the banking scene caused by regionals south of the border, I view the space as potentially rich with value. Of course, bank stocks will always be exposed, as the economy tilts into an economic contraction or recession.
That said, bank investors know that it’s typically not a good idea to sell bank stocks in the heat of a downturn. After an already painful selling spree, I actually think the bank stocks are a decent value here. It will not be easy to buy banks, with some plunging into an ugly bear market.
Still, those who seek deep value should not “overvalue” the bad news events that led the banks lower in recent months. Instead, they should put in their own homework and determine if the risk/reward scenario is suitable for them. Personally, I like the banks here, even if popular analysts on Wall and Bay Street move forward with their downgrades.
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Burry bets on the American regional banks
Iconic investor Michael Burry made headlines this week, as it was discovered that he placed a bet on a few troubled U.S. regional bank stocks. The regional banks are under so much pressure, and there is a ton of risk right here. Burry has courage, though. And though I wouldn’t personally take such a risk with the names Burry has been betting on, I think his moves suggest the banking scene may be where there’s value.
In this piece, we’ll check out three banks that I view as deeply discounted after so many months of extreme selling. Let’s have a look at two Canadian regionals (I believe Canadian regionals are less risky than some of their U.S. counterparts) and one heavyweight.
Canadian Western Bank
Though I find Canadian Western Bank (TSX: CWB) to be one of the more investible regional players, investors must understand the stakes as we head into recession. The stock has been crushed since peaking in the middle of 2021.
At writing, shares trade at 7.19 times trailing price to earnings (P/E), with a 0.66 times price-to-book (P/B) multiple. Given the earnings-eroding headwinds that could be on the horizon, I think the P/B ratio tells a better story of the value to be had.
Finally, the 5.2% dividend yield seems worth grabbing, as long as you’re prepared for a rocky ride. The stock is no stranger to 40-50% plunges. With a high 1.7 beta, the stock is likelier to be a wilder ride than the TSX Index.
Laurentian Bank
Laurentian Bank (TSX: LB) is another volatile regional bank that’s seen shares crumble in the face of headwinds. The stock trades at 6.4 times trailing P/E with a 0.52 times P/B. Like CWB, I like to value LB stock on a P/B basis.
It’s an even cheaper play than CWB. Though the Quebec-based regional bank could face more of the same as a recession arrives, I find it hard to pass up on the name with such low expectations in place.
The technical picture may not be pretty. That said, longer-term value investors who remain patient could be rewarded handsomely if the Canadian recession comes and goes quickly.
Bank of Montreal
Finally, we have Bank of Montreal (TSX: BMO), which bounced modestly off its 52-week low. The big bank looks to be punished for its recent acquisition of Bank of the West. Undoubtedly, BMO could have gotten a better price had it waited. In any case, I think BMO has enough firepower to explore further opportunities in the U.S. regional scene now that valuations have contracted.
Of the three banks in this piece, BMO stands out as the least risky. The $83.15 billion behemoth is a dividend heavyweight that I don’t think will be held down for too long. Management is just too good.
