CIBC (CM) is a high-quality Canadian bank that, at current levels, U.S. investors would be wise to go north of the border for.
While the big American banks offer decent dividends, alongside a fair amount of upside, those seeking greater yields, discounts, and geographic diversification have the incentive to make the move to the TSX.
The No. 5 Canadian bank has historically received a pretty bad rap. It suffered amplified downside relative to its peers during the last two major market crashes, prior to last year’s coronavirus sell-off.
Despite this, I remain bullish on the name. (See CM stock charts on TipRanks)
Moving on from Tough Past
During the Great Financial Crisis and Dot-Com Crash, shares of CM lost more than 55% of their value. Not only was the downside extreme, but the recovery trajectory was not as steep as its peers.
Unlike Citigroup (NYSE:), or Bank of America (NYSE:), CIBC eventually did recover from the 2007-08 market crash, which severely punished many banks, whose loan books soured.
You could refer to CIBC as the bank that takes more risk when credit is easy, if you will. Yet, its sub-par history is exactly that: history. CIBC has since moved on, and under new leadership, it has evolved to become a pretty well-run bank from a risk/reward standpoint.
Remarkably, CIBC stock did not take the hardest hit during the 2020 coronavirus crash. It recovered in record time, surging to a new high in a little bit over a year later.
Despite the past year of exceptional performance, CIBC stock still does not command a lofty multiple. At 11.2 times trailing earnings, CM stock still seems like a bargain, even with the momentum behind the name.
Could it be that investors think CIBC’s relative outperformance last year was a fluke?
Unlikely. In any case, U.S. investors should feel compelled to pick up the Canadian bank, and its sizeable 4% dividend yield, which could grow quickly moving forward.
Risks U.S. Investors Should Weigh
The Canadian and U.S. banking scenes have their fair share of differences, and it’s important to understand them before venturing north of the border for higher yields, or better valuations offered by the Canadian banks.
Most notably, CIBC is exposed to Canadian mortgages. In the U.S., the housing market is hot. In Canada, it’s arguably hotter, with various Canadian pundits of the view that their housing market is in a bubble.
If the unstoppable Canadian housing market sells off sharply, CIBC stock would surely feel the full impact. So, U.S. investors must realize that the dividend yield and lower price-to-earnings multiple do not come for free. There are risks, and such risks should be well understood.
Wall Street’s take
According to TipRanks’ analyst rating consensus, CM stock comes in as a Strong Buy. Out of 10 analyst ratings, there are eight Buy recommendations, and two Hold recommendations.
The average CM price target is $128.74. Analyst price targets range from a low of $122.63, to a high of $133.78.
Disclosure: At the time of publication, Joey Frenette did not have a position in any of the securities mentioned in this article
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