Tuesday's TSX breakouts: Major bank stock nearly fully valued, upside appears limited

It was a quiet, but positive, day in North American equity markets on Monday. In the U.S., the Dow Jones Industrial Average and the S&P 500 Index once again both rallied to record highs. The S&P/TSX composite index advanced 50 points, or 0.35 per cent to 14,532. Trading volume in the S&P/TSX composite index was quite low. Within the Index, there were 157 stocks that advanced, 76 securities declined, and seven stocks were unchanged. So far, July has been a sizzling month for equity investors. The TSX Index is up 3.33 per cent with gains across all 10 sectors. Year-to-date, the Index is up 11.70 per cent.

On today's Breakouts Report, there are 37 securities on the positive breakouts list (stocks with positive price momentum) and just six securities on the negative breakouts list (stocks with negative price momentum).

Discussed today is a bank stock that appears on the positive breakouts list. The valuation for this stock is approaching its peak historical multiple. In other words, its valuation is getting expensive suggesting upside price momentum may be limited in the near-term. The bank stock I am referring to is Bank of Montreal (BMO-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

The Company

The Bank of Montreal is a financial services provider.

Before the market opened on May 25, the company reported second quarter fiscal 2016 results just shy of expectations. Adjusted earnings per share came in at $1.73, a penny below the Street's forecast of $1.74. Adjusted return on equity (ROE) was 12.1 per cent, down from 13.2 per cent last year. The Common Equity Tier 1 (CET1) ratio was 10 per cent, down from 10.1 per cent last quarter. The share price increased 1.35 per cent that trading day.

Dividend Policy

In May, the company announced a 2 per cent increase to its quarterly dividend, raising it to 86 cents per share from 84 cents. The equates to $3.44 on a yearly basis, and an annualized yield of 4.05 per cent.  Management has consistently announced a dividend increase every other quarter over the past several years.

Valuation

The stock is trading at a high valuation relative to its historical levels. According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of  11.5 times the 2017 consensus estimate, above its five-year historical average of 10.4 times. Furthermore, the stock is trading close to its peak P/E multiple over the past five years of 12.2 times forward earnings.

Analysts' Recommendations

There is just one buy recommendation, 15 hold recommendations, and two sell recommendations.

According to Bloomberg, the one-year price target is $83.76, implying the stock is fully valued. Target prices range from a low of $70 to a high of $95. Individual target prices provided by 15 firms are as follows: $70, $75, $78, $81, $82, three at $84, two at $85, two at $86, $88, $94.19, $95.

The consensus earnings per share (EPS) estimate is $6.74 in fiscal 2016, rising just under 4 per cent to $7.39 in fiscal 2017. Looking at its peers, the Bank of Montreal has the slowest forecast earnings growth, with one exception. According to consensus estimates on Bloomberg, earnings per share is forecast to rise 4.5 per cent at Royal Bank (RY-T) between fiscal 2016 and fiscal 2017, rise 5.4 per cent at TD Bank, jump 7 per cent at Bank of Nova Scotia, and decline 1.8 per cent at CIBC.

Chart Watch

The stock chart is concerning as there are signs that the stock price may soon be overextended.

First, the stock price is approaching its previous peak of $85.42, reached in September 2014. This will be a significant overhead resistance level. If the share price fails to break above this level, a bearish double top pattern may appear. A double top pattern indicates a reversal in the uptrend.

Second, the relative strength index is at 66, suggesting the shares are approaching overbought territory. Generally, a reading at or above 70 indicates an overbought condition.

There is downside support around its 50-day moving average, which is at $82.61, and failing that, there is support around $80, and then around $78, which is near its 200-day moving average (at $78.13).

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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Below is a list of securities principally from the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Securities on the positive breakouts list have displayed positive price momentum during this period. Securities on negative breakouts list have experienced negative price momentum.