With long-term prospects relatively positive, Blumas believes the uncertainty in the financial stocks may be creating a tremendous buying opportunity.
“There are some Canadian banks with really high-quality earnings, and their stocks have been hit really hard,” he says, citing Canadian Western Bank as an example. “You can buy a few of these Canadian banks that have a really good competitive position with single-digit-multiples of earnings — that’s not so bad. It might take a few years for things to shake out, so there may be some downside risk in the short term. I would assume your upside potential [over the long term] would become a little bit better than your downside risk.”
On the mutual fund side, independent analyst Dan Hallett, principal of Dan Hallett & Associates, doesn’t see much spillover into Canadian funds happening, althought there are some that have significant exposure to U.S. financials.
“There are a few U.S. dividend funds in the market, and that’s probably the first sort of category that comes to mind,” he says.
Hallett say investors have to look at their funds on a case-by-case basis because some managers have taken larger positions in financials under the belief they were bottoming out. Obviously, now with the bankruptcy of Lehman Brothers, the takeover of Merrill Lynch and with AIG hanging by a thread, that belief appears to have been wrong.
“A lot of managers were starting to buy financial stocks late last year. Many of these were good managers in my opinion. I think they got in quite early in terms of the timing to increase their weightings with certain stocks. They’ve definitely been hurt,” he says.
The decline in Canadian bank prices can also present an opportunity for investors in dividend funds because many of these companies have either increased or kept their dividends the same, meaning the dividend yield can be purchased for less.
Hallett urges investors and advisors to do their homework before bargain hunting for Canadian dividend investments.
“The Canadian banks aren’t suffering as badly as their U.S. counterparts. At the same time, they’ve certainly been beaten up,” he says. “Whenever you see a company’s dividend [yield] rise because its price has been punished, you have to ask ‘how safe is the dividend?’ You need to be looking at the balance sheet — the coverage ratio on an earnings cash flow basis — to ensure they have enough money coming in to cover the dividend.”
Filed by Mark Noble, Advisor.ca, firstname.lastname@example.org