The Canadian financial scene has been stuck in a rut over the past year, with bank stocks dragging their feet, weighing down the broader TSX Index in the process. Undoubtedly, banks are out of fashion these days. Who wants to stick around in the top financial firms when there’s an economic recession looming? Indeed, the case for getting bullish on bank stocks is an unpopular one.
The banks are up against it. There’s no question about that. However, the banks seem so oversold that alleviation of headwinds may not even be needed to spark a recovery rally. Undoubtedly, whenever you’ve got such oversold conditions, anything minor may be enough to turn the tide. Similarly, if a lack of bad news flows in, the most-battered bank stocks may actually find a ground to build on.
Bank of Montreal
In the case of Bank of Montreal (TSX: BMO), it’s one of the two U.S.-exposed banks that has taken a left hook on the chin in the first half of the year. Failure of regional banks in the United States was a big concern for the broader banking scene. With provision for credit losses eroding away quarterly results, it seems smarter to wait on the sidelines and wait for that one reversal of trend before jumping in.
Doing so could cost considerable upside, though. The stock market did not wait for investors to get in back in the final quarter of last year before the next surge took hold. Similarly, the banks aren’t going to wait for you to purchase shares before bottoming out and roaring back.
Indeed, a potential recession never bodes well for any bank, no matter how well-run or well-capitalized. That said, when the new bull roars, and investors begin to discover we’re in the earlier innings of the next economic expansion, the banks can take off in a hurry. Bank of Montreal got clobbered during the 2020 stock market crash. Those who bought despite the soaring macro tensions were able to land quick gains.
Though the recent bear market in BMO stock isn’t as horrific, I think gains could come fast and furious once Mr. Market decides he’s punished the broader Big Six basket by too much.
Looking back, BMO probably should have waited before pulling the trigger on Bank of the West. Though management can’t turn back time, they can make the most of the situation. As BMO continues to focus on the long haul while ensuring the nearer-term headwinds don’t weigh it down too heavily, look for BMO stock to find its footing again.
The nearly 5% dividend yield is so impressive. In three years, I think appreciation could cause the yield to contract back below 4.5%.
National Bank of Canada
National Bank of Canada (TSX: NA) is another big Canadian bank that may be a big bargain for value investors. Relatively speaking, NA stock is a lightweight in the Big Six, with a $32.66 billion market cap. However, it’s been flying way faster, with 53% in gains over the past five years.
Don’t look now, but that’s a far higher gain than its five bigger brothers. A magnificent management team and a large focus on the domestic market (a big presence in Quebec) have been reasons for outperformance. I think the Big Six underdog could continue to gain ground from here. The 4.23% dividend yield is also attractive.
Sure, National Bank is small, but it’s been a major winner for investors over the past five years. My bet is it’ll continue to outperform the pack.
