August 17, 2007, 7:00 am

On Sale: Banks Stocks! My Favourite Picks

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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I was recently checking the Canadian banks stocks and I saw this sign in front of all of them: ON SALE. It seems that there is a good rebate going on all of them. With my Smith Manoeuvre in place, I am buying on a monthly basis shares of dividend funds. This type of fund includes generally a good part of bank stocks. The fund is dropping in value right now, which is perfect. I can then buy more shares for the same price!

The bank stocks are dropping because of two major factors. The first one is the panic that is starting on all markets. Everybody is getting nervous and cashing their profit. The second thing is the subprime lender crisis. Subprime lenders are financial institutions that provide mortgage to higher risk clients (above norm TDSR or with bad credit behaviours). This specific market is slowing down as many people could not afford their mortgage payment (duh!) and therefore, financial institutions are loosing money.

The market fears that the crisis will go up north (in Canada) and also in Europe. Recently, BNP Paribas announced that institutional investors were not able to withdraw their shares in three specific funds. What were they? They were invested in US subprime market…

So this is why Canadian banks are taking a beating right now. As of beginning of August, on average, they have dropped by more than 11% since last April. This seems to be a good discount to me. Economic is strong in Canada and empowered by western provinces. I am pretty sure that Canadian banks results will be pretty good this year also.

My favourite picks for bank stocks:

I have two stocks I would buy presently. I already have National Bank (NA) in my portfolio and I think it is a good timing to buy some more. They are on pace with their objective so far and they have several departments that are doing pretty well so far. It is definitely a good occasion.

My second pick would be Band of Montreal (BMO), especially because of its high dividend yield. As of yesterday morning, it was showing at 4,4%. It is a great protection against inflation considering the fact that the stock has a really good chance to rise in the following months. It went from $70 to $61 in a span of a month.

I’ll be looking at stock options on both of them. It will require less cash and I still have a pretty good chance to make a few bucks out of it!

However, I would still wait couple of months if you plan on invest massively into Canadian banks. The main reason is history: back in 1998, when Long-Term Capital Management declared bankruptcy, banks dropped on average by 46%. So maybe there is still more rebate to be announced in the following months!

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Another big factor that affect bank stocks is interest rates. When people think the rates are going up then the stocks will go down. As of yesterday, it looks like the next rate hike will be delayed if it happens at all so that helps push the stocks up.


by: The Financial Blogger | August 17th, 2007 (1:34 pm)

FP, I hope it will be delayed for two reasons:
1- I hold bank stock
2- My mortgage is related to prime 😉

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[…] This one goes back a bit, but I just came across it. The Financial Blogger wrote about bank stocks being on sale – if they were on sale then, they certainly are on sale now! […]