Bank of Montreal (BMO.TO)

He doesn’t own BMO, he prefers Scotia (BNS-T), Royal (RY-T) and CIBC (CM-T). The one lagging in valuation lately is probably CIBC. Some banks are expanding in the US which is a very competitive market, and it could take several years before you start seeing any significant gains to the bottom line.

Chart shows a Bull/Flat formation. The top of the flat is represented by disbelievers, people who don’t want the stock and are taking advantage of rallies and selling their position. The key on this is that it has broken out. The buyers are actually winning. That means it will likely go higher. There is a decent chance that this can reach the recent high and go a little higher. There is a nice little bull/flag formation.

Has been Short on this for over 8 years now, through a Pairs trade, being Long on Guardian Capital (GCG-T). When he did this in 2009, Guardian was trading at about a 25% discount just to the value of its BMO shares. Effectively, he was buying BMO $.50 to the dollar. Both stocks have gone up, but Guardian has gone up more and the spread has widened. This is one of the reasons he really likes Pair Trading.

He likes all the banks. However, in Q3 this bank had negative operating leverage, a -2.2%. Their US operations at flat earnings which were kind of disappointing. There is uncertainty on the street as to whether they can maintain their efficiency ratios. The weaker US$ hurts them a little. They have a very favourable Cdn/US business mix. This is one you can buy at around these levels.

If you are a long-term investor, you can’t go really too far wrong with Canadian banks. They tend to be these really solid, steady growers. The multiples contract and expand. Banks have some of the best dividend growth history out there. If you are buying for a long-term dividend growth, it is one you just buy and tuck away.

Rising interest rates are positive for banks. Banks in general have been in a near term downtrend. He is looking at the banks, but now is not the time to buy them. The chart on this shows lower highs and lower lows, but at some point, the banks will consolidate. Seasonally, October is generally a good time to buy banks, because they tend to move up into the next earnings season at around Christmas.

Not his favourite. He has trouble dissecting their strategy. It is more US oriented than it used to be. See top picks today. It is a hold because he likes the industry.

Which Canadian bank would you buy, excluding Toronto Dominion (TD-T)? To him, Bank of Montréal (BMO-T) looks pretty good. He sees an upside in this. It is trading at a discount to its EVB which is $105.66. His model price is $106.43 which is 12% higher.

Toronto Dominion (TD-T), Bank of Montréal (BMO-T) or Bank of Nova Scotia (BNS-T)? He likes the financials. In Canada, banks and the insurers have underperformed the rest of the sectors this year. With interest rates starting to move higher, this is good for banks. Of the 3, this is about the cheapest.

Canadian banks pretty much go in lockstep with each other, but there are deviations. When you look at their business mixes, they all are quite different businesses. The wildcard for a number of these banks has typically been the capital markets side, which tends to be a lot more volatile than earnings. He would not have any argument with somebody wanting to own this. (See Top Picks.)

In the Canadian banking sector, you have to separate the ones which are highly dependent on Canadian revenues, and those who are more dependent on outside revenues. This one is right in the middle, but probably more dependent on outside revenues. Only 60% of its revenues come from within Canada, with the rest coming from the US. Earnings report was not great and the stock got hurt a little. He has seen this before with a lot of the bank stocks, so it is not a name he would give up on at this point. It could even be an entry point at this time.

Preferred Series V. A new issue that has just been trading for a few weeks. It does not have a floor feature, because banks are not allowed to do so. Has a 4.5% coupon.

Bank of Montréal (BMO-T) or Manulife (MFC-T)? Doesn’t own either, and prefers some US banks, although many of them are no longer as attractive and he has had to reposition.

You can’t build a portfolio without having Canadian banks in it. He likes what this bank is doing in the US. There is growth in the US and this bank is positioned to take advantage of it.

This bank has been making some very strategic moves in terms of getting costs down. In terms of their US exposure, Harris is doing a lot better. They continue to make tuck in acquisitions. Increasing rates will be good for net interest margins. Dividend yield of 3.5%, and has had an excellent track record of dividend growth over the past decade. (Analysts’ price target is $101.20.)