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The Globe and Mail

My favourite TSX bank buying strategy is paying off again

Globe and Mail columnist David Berman.

Canadian bank stocks are performing well this year, but one stock is shining brighter than the rest: Canadian Imperial Bank of Commerce.

CIBC has gained 9.2 per cent so far in 2017, which is about 1.5 percentage points better than the average gain for the biggest five banks and more than 3 percentage points better than the laggard (Toronto-Dominion Bank).

Why does this matter? CIBC was highlighted in this space late last year as the best bet among the biggest five banks, for the simple reason that it lagged its peers in 2016.

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Buying last year's laggard in the banking sector and holding the stock for a year has delivered an average annual return of more than 16 per cent, for data going back to 2000. That's considerably better than the average gain of about 10 per cent for a basket of big banks, and about four-times the gain you'd get from the S&P/TSX composite index.

Our research suggests that this bank stock-picking technique beats other approaches, such as buying the bank stock with the biggest dividend yield or lowest valuation. (We have excluded National Bank of Canada from this strategy for now, because it is smaller and more domestically focused than the others.)

Though the strategy looks compelling, it doesn't always work from year to year. You would have lagged bank peers with Bank of Nova Scotia in 2015, CIBC in 2013 and Bank of Montreal in 2006, to mention the three most recent examples of misfires.

But it worked well last year – with a second consecutive attempt at owning Scotiabank – and 11 of the previous 16 years, for a success rate of about 70 per cent. Success means beating the average return of the biggest five banks.

However, it's worth noting that the previous year's laggard has become the top-performer in the current year more than 40 per cent of the time, such as last year, when Scotiabank surged nearly 34 per cent.

Today seems like a reasonably good time to update the strategy, given that the biggest banks concluded their fiscal first-quarter reporting season last week.

This year is far too young to make any predictions on whether CIBC will maintain its edge. And as we noted in December, the bank didn't really stand out in 2016: All of the biggest banks enjoyed strong gains as investors began to relax about the threats posed by worrisome energy loans and slow Canadian economic growth.

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CIBC was no exception, delivering a gain of about 20 per cent, which trailed its peers only slightly. Given that the bank wasn't much of a laggard last year, there isn't a large gap to close with its peers in 2017.

Still, we'll take the stock's early success as an encouraging sign until we update the strategy next quarter.

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