Friday, March 14, 2008

Banks? Good Value?

I'm currently thinking that, despite all the market turmoil at the moment, that it really might not be such a bad time to be starting out in the investment world. I mean, the market has fallen significantly, so there should be some good buys around, if only I can accurately gauge when things are near the bottom.

So I'm looking at the banks, which have been very hard hit by this credit crisis. Bank of Montreal (TSX.BMO) is off 45% from its 52 week high, as is CIBC (TSX.CM). The much better performing ScotiaBank (TSX.BNS) and Toronto Dominion (TSX.TD) are down around 20% from their highs. Price-Earnings ratios for most are in the 10-12 range - CIBC is the exception, with a PE of 22. The historical average for PE is 16, so it's looking to me like there just might be a bargain to be had. Nothing I've read has suggested that these banks might be going under, so when the recovery comes, they should go up quite a bit. Right?

The problem with using PE to base your buying decisions is that it relies on earnings remaining fairly constant. Right now, the professionals seem to be saying that bank earnings are unpredictable, and it would be a good idea to instead look at price-book value ratio. One article I was reading suggested that they're still overvalued using this ratio, when compared to other market troughs.

So I'm not sure what to think. I'm waiting until I get an account open with a lower-cost broker - I decided on Questrade - before I buy anything else, since the TD Waterhouse commissions really hurt potential profits, and do nothing but increase the pain on losses. But I think that if the banks seem to have flattened out by the time that's complete next week, that I'll buy into one of them, I'm currently leaning towards BMO, but I need to look into it further.

No comments: