What are we looking for?
North American diversified banks.
The screen
North American financial companies have been under pressure this year and diversified banks (a wide range of financial services including corporate lending and retail banking) have not been immune to the volatile market conditions.
Year-to-date, the S&P/TSX diversified banks index and the S&P 500 diversified banks index are down, 7.3 per cent and 6 per cent, respectively. Earnings are at record levels, however, and relative valuations could be very attractive. With a median price-to-book ratio of 1.56, for example, the TSX banks are at their lowest levels since the 2008-09 crash.
To search for some potential ideas within the sector, my colleague Lawrence Ullman and I used Bloomberg to rank diversified banks in the S&P/TSX composite and the S&P 500 based on the best mix of:
- price-to-book ratio;
- forward PEG ratio (P/E divided by sustainable growth rate);
- dividend yield;
- three-month consensus earnings estimate revision.
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high net worth individuals, corporations, endowments, charities and foundations.
What we found
We used Bloomberg to perform a back-test starting Dec. 31, 1993, reselecting an equally weighted portfolio of the top five diversified banks every year-end. For a full comparison of all index constituents, we'll list all 12 banks in the chart.
Over the full period, this strategy would have generated an annualized total return of 11.6 per cent compared with 7.9 per cent for the S&P/TSX total return index and 8.9 per cent for the S&P 500 (all returns stated in Canadian dollar terms).
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Limited.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.