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moneysense.ca, 7/06/07
This and That
- While a variable-rate mortgage will usually save you money, Rob Carrick suggests in The Globe and Mail that now would a good time to opt for a five-year fixed-rate mortgage.
- Canadian Banks and Insurance blog does such a good job of covering our giant financial institutions. Here’s their take on the latest earnings reports from Bank of Montreal (TSX: BMO), TD Bank (TSX: TD), Royal Bank (TSX: RY), Scotia Bank (TSX: BNS) and CIBC (TSX: CM).
- The Summer 2007 issue of MoneySense magazine features an excellent article titled 10 Laws of Building Wealth (not available online). If you are not a subscriber, the article is worth a trip to the local library.
- The sleep-at-night factor is very important in making financial decisions. Four Pillars explains why he opted for a five-year fixed-rate mortgage.
- How long can the good times last? James Daw poses the question for Canadian equity investors who have enjoyed an annualized return of 21% over the past four years.
moneysense.ca, 7/06/07
Thanks for the link!
I must say that James Daw had rather impeccable timing for his article.
Mike
“Canadian equity investors who have enjoyed an annualized return of 21% over the past four years”
Wow! This can’t be a good sign…
Dave: The total returns for the TSX for the past 4 years:
2003 – 26.7%
2004 – 14.5%
2005 – 24.1%
2006 – 17.3%
Our large caps are way overvalued. For example, our big 5 banks have some of the highest P/E ratios in the world. That’s why I’ve been putting all my new money in cashable GICs since the beginning of the year.
Although I’m on the sideline waiting for a major market correction, I have to point out to everybody that 3 days still doesn’t make much of a “trend”. If the selling continues into the summer (past June 21) then I’m going to take a closer look at things. Usually in the summer, the professional traders get out and volume falls and that’s when I like to go shopping for bargains.
According to dividendinvestor.ca the dividend yields of the major banks are all higher than their 5 year averages, wouldn’t this indicate that they’re CHEAPER right now than the average value over the last 5 years? What is considered a reasonable P/E historically for banks?
The past 5 years have been unusually good. Revenues are growing at reasonable rates but earnings and dividends are growing at an amazing pace. The main reason: the credit cycle just keeps improving. Surely, at some point in the future, the credit cycle will turn and what happens to earnings growth then?
Just looking at dividend growth is misleading because many of the banks have hiked the payout ratios. Personally, I hold the same opinion as Phil about our banks and while I plan on holding what I have, I am not adding new money now.
To Mr Cheap, my opinion is derived from comparing the P/E ratio of Canadian bank shares against those available for me to buy on NYSE or NASDAQ. Of course, I realize that the reason why Canadian banks trade at a much higher P/E is because it’s an oligopoly in Canada, versus a totally open market with serious competition in the USA and most of the banks I’m looking at in the USA are smaller regional banks. So, obviously there is a premium associated with the fact that there is so little competition in Canada and that allows Canadian banks to charge whatever they feel like for fees and what not… But if I can currently buy bank shares in the USA at a P/E ratio of 7 (along with the possibility of them being a takeout target), then why would I pay a P/E of 13.5 for a Canadian bank (and without the possibility of getting taken over)? So, for me, the pricing is all relative to what I can buy other banks for on other exchanges where I trade.
Oh yeah. And like CC, I’m not selling what I have right now, I’m just not putting any “new money” into banks or even the TSX in general right now.
I remain fully invested in my US portfolio, so I’ve been taking quite a beating down there in recent days. But in terms of P/E ratios, I feel that there are still some very good deals on the NYSE and NASDAQ even before the recent pullback. Too bad that I’m fully deployed in that account, else I’d be buying more.
Phil & others,
What kind of companies are you looking at in the U.S.?
CC & Phil: Thanks for the explanation!
So right now in the US, even though BAK and WM look like great buys according to their dividend yields, according to their P/E (10 and 12 respectively) they’re overpriced?
What are P/E so low for banks? Doesn’t Graham consider under 20 to be “cheap”?
I don’t follow BAC or WM, so I don’t have an opinion on these stocks and whether they are a value now. I only follow the two banks I own: BNS and TD. My US exposure is now mostly indexed.
I’m not familiar with BAK at all. I see that WM is Washington Mutual, but I don’t follow them either.
For US Banks, I own CORS on NASDAQ. They are a very odd bank. They only have 22 branches so they are miniscule in their operations, but for the past decade or so, they didn’t use any of their bank profits to expand their business – instead, they dumped all their profits into owning shares of other US banks. As a result, a significant portion of their earnings comes from dividends from other US banks and I view owning their shares as being kind of like an ETF of US Banks. As of today, they have a P/E ratio of 5.9 and a yield of 5.7%, despite recently taking a hit because some of their investments (remember what I mentioned above about them investing their profits into other banks) took a loan-loss writedown for some sub-prime mortgage lenders that they owned.
On the Canadian side of the border I have BMO. But I’ve held it for more than a year. I won’t add to my position right now, but I’m not planning to sell it anytime soon either.
To Telly: My most recent stock purchases in the USA is AINV on NASDAQ and CORS on NASDAQ that I mentioned in the previous note to Mr Cheap.
AINV is a private equity fund which is run by Apollo Investment Management. Note that this is their private equity fund – I didn’t buy shares of the Apollo Investment Management firm itself. Anyways, this private equity fund is classified as a Business Development Company in the USA, which means that they don’t pay any corporate taxes if they distribute substantially all (90%) of their profits to unitholders and the unitholders pay the tax on the distributions. Does this sound familiar? Kind of like a Canadian Business Income Trust? Our government is a bunch of morons but that line of thought takes me on a complete tangent.
Anyways, back on topic, AINV is basically an exchange traded mutual fund that holds a couple billion dollars worth of either debt or equity of small and medium sized private or public companies. Compared to traditional mutual funds, private equity funds are obviously not limited to publicly traded companies and will go anywhere to get the best returns. Also unlike traditional mutual funds, private equity tends to have seats on the boards of the companies that they hold a stake in, so they can directly affect the direction of the company. To see what the earnings looks like, you have to look at their EDGAR filings, but when I checked it a couple of months ago (when I bought it), it was trading at a P/E ratio of about 8. Right now it’s probably still in the 9-ish range and a yield of just below 9%.
Oh, if I had more money stateside to invest and if I were considering yet another private equity fund structured as a Business Development Company (I already have two of them, so I’m not sure I would want to own a third one), then I would seriously consider ARCC, Ares Capital. I would check the EDGAR filings of them to study the financial health of the fund, but I think ARCC owns much better assets than AINV. ARCC owns debt or equity belonging to such familiar household names as Samsonite luggage and Fisher Plows and they’re currently yielding 9% at Friday’s closing price. At the time when I bought AINV, I think ARCC was trading at a higher price and didn’t seem to offer as much value. As always, do your due diligence.