The Canadian banks have been in a rut for a few years now. If you’re a new Canadian investor, you may view the group as “dead money,” given the lacklustre results posted of late. Even looking further back, the results aren’t exactly compelling. Not when you can score a better shot at double-digit returns from those red-hot American mega-cap tech stocks!
Take shares of CIBC (TSX:CM), a $59.13 billion Canadian bank that’s down more than 14% in the last two years. Undoubtedly, recession jitters and macro headwinds have caused the bank stock to underwhelm. And though the juicy dividend (yielding 5.65%) has helped pad the recent selloff, many new investors likely aren’t drawn to high yields if there’s been a history of capital losses.
What good is a high yield if you’re just going to be in the red on the front of total returns (that’s dividends and capital gains put together)?
In any case, investors must remember that past performance isn’t an indicator of where a stock is going next. Indeed, that’s the saying that many advisors have instilled in their clients. As an investor, it’s your task to figure out where a stock will be going next, not where it has already been.
2024 could be a big year for the bank stocks!
A hot stock that’s done nothing but soar can plunge after you’ve picked up shares. On the flip side, a tanking, laggard of a stock can turn a corner and deliver bountiful gains if you get in at a price that’s way below Mr. Market’s estimate of intrinsic value.
As it stands today, I believe the bank stocks are quite undervalued. Many may be inclined to give up on them, but as they show signs of life (many rallied sharply off October lows), I think such strength can carry into 2024 and perhaps 2025.
Let’s look at two Canadian bank stocks I find enticing for the new year:
CIBC
First up, we have none other than CIBC, a Canadian bank that has considerable exposure to domestic mortgages. Indeed, rates have risen quite a bit in recent years. But there are signs that lower rates could be in the cards, with the Bank of Canada that may consider a rate cut in the first half of next year. Indeed, any such rate reductions would be welcomed by mortgage holders. As such, I think the fears over CIBC’s housing exposure are greatly exaggerated.
The stock is sitting down 23% from its 2022 all-time high, a high that I think could be hit within 18 months as CM stock’s relief bounce continues. The stock’s sharp recovery from October lows is remarkably strong, bringing shares up over 30% in just a few months. I view the strength as sustainable and more than warranted as we move into a year that could see more in the way of macroeconomic relief.
National Bank of Canada
National Bank of Canada (TSX:NA) is another one of the smaller players in the Canadian Big Six banking cohort. As it turns out, the smallest (number six) of the Big Six has been one of the best financial stocks to own in recent years, with shares up a whopping 80.5% in the past five years.
Those are incredible gains that aren’t indicative of a sluggish banking industry. Moving into 2024, I expect National Bank to use its relatively small size ($34 billion market cap) to its advantage as it looks to continue outdoing its peers. The stock trades at 10.7 times trailing price to earnings, with a 4.22% dividend yield. It’s still quite cheap, in my books.
