NVIDIA (NASDAQ:NVDA) is one of the most popular stocks in the world right now. With a US$1.05 trillion market cap, it is truly beloved by investors. This is one of the reasons I don’t own it. NVIDIA stock has been bid up so high that it now trades at a princely 39 times sales. To put that into perspective, NVIDIA would need to hand you 39 years’ worth of its revenue in order to repay your investment in the stock — assuming it didn’t grow.
Granted, NVIDIA probably will grow — it has a massive catalyst right now in the form of artificial intelligence chips. But 39 times sales and 222 times earnings is an extraordinarily expensive valuation.
Rushing headfirst into NVDA right now probably isn’t the best idea. That doesn’t mean you have to avoid investing altogether, though. Many stocks in today’s market are inexpensive and sport high dividend yields. Canadian bank stocks, in particular, have truly stratospheric yields at the moment. In this article, I will explore one Canadian bank stock I’d buy before even looking at NVIDIA.
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Bank of Montreal
Bank of Montreal (TSX:BMO) is a Canadian bank with highly diversified operations. Sporting a 4.99% dividend yield at today’s prices, it’s one of the highest-yielding Big Six banks.
BMO is one of Canada’s most international banks. It has a large presence in the United States, which includes both a retail bank and an investment bank. This geographic diversification is a good thing, because it limits BMO’s exposure to Canada’s overheated housing market.
BMO had a mixed showing in its most recent quarter. In the second quarter, BMO delivered the following:
- $1.059 billion in net income, down 74%
- $2.2 billion in adjusted net income, up 1%
- $1.30 in diluted earnings per share (EPS), down 82%
- $2.93 in adjusted EPS, down 9.2%
Overall it was a mixed showing. The release beat expectations on revenue but missed on EPS.
Why it’s a good value
BMO stock is cheap at today’s prices. It trades at the following valuation multiples:
- 9.59 times earnings
- 11.8 times adjusted earnings
- 2.7 times sales
- 1.16 times book value
Apart from the price/sales ratio, all of the ratios above are below average by the standards of the TSX stock market today. This suggests that BMO stock is sensibly valued.
Risks to watch out for
As we’ve seen, BMO is a quality bank that has a modest valuation. There are many good reasons to invest in it, but there are risks to watch out for:
- The inverted yield curve. Canada’s yield curve is inverted, meaning short-term bonds have higher yields than long-term bonds. Banks like BMO borrow on the short end of the curve and lend on the long end, so inverted yield curves tend to be bad for their margins.
- A slowing economy. There are signs that Canada’s economic growth is slowing down. For example, unemployment ticked up in July. Bank earnings tend to dip during recessions. So, the state of the economy could pose problems for BMO.
The risks above are serious enough to merit attention. Nevertheless, BMO has enough things going for it right now that I’m comfortable holding a small position.
