Four Canadian Financial Plays

Everyone is well aware of the issues that most of the US (and, to a certain extent, European) financial institutions have had. Many of them were overleveraged, and decided to push the envelope on good lending practices. It may be a long time before some of them (if they ever do) emerge to be good, solid investments again.

The same can't be said (with a few exceptions) about Canadian financial institutions. Many have limited sub-prime exposure (in some cases, none at all). However, many have been hit with declines of 20% or more from their peaks. With yields now north of 4% (some 6%), and an economy that is still showing some signs of life, now might be the time to get in.....

Here are a few to watch:

1) Power Financial [TSE:PWF]

This stock has been hit hard, and perhaps, with good reason. However, when you look at the quality of its assets, you have to wonder if it has been excessively punished. One negative towards Power Financial is the simple fact that as a holding company, it often trades at a negative to its Asset Value (meaning that it trades for less than the holdings that it owns). People simply don't know how to value it properly (think Berkshire Hathaway).

With majority ownership in Great West Life (a worldwide insurance and annuity company, with a nice balance around the world), IGM (A dominant Mutual Fund company in Canada), Mackenzie Group (the other dominant Mutual fund company in Canada), as well as positions in LaFarge, Suez, Total and other companies, it offers a good way to play the growing "Baby-Boom Investment" play.

With an average annual growth north of 15% for over a decade, this stock deserves to be trading at a premium to the market. What is dragging it down is the belief the redemptions of mutual funds will continue, as well as worries over its acquisition of Putnam. However, this stock is now yielding over 4% (and PWF has an incredible history of raising its dividend, often 2x per year). It is trading at less than 10x 2009 projected earnings.

When it gets back to its normal multiple of the "low teens", this stock should be north of $40 within a year (now trading in the low 30's)

2) Manulife Financial (MFC)

Another stock that has been unduly hit, Manulife is a premier Life Insurance player in the world. With a dominant play in Canada, an ever-growing presence in China, and a strong presence in the US (thanks to its flawless purchase and integration of John Hancock), Manulife is a cash flow machine. One criticism seems to be the fact that they have not distributed some of their cash lately (even with a dividend of 2.6%!). This is an odd criticism, as they are obviously looking to use this money for other acquisitions (and considering their stellar reputation in integrating firms, one would think that this would be a strength!).

Manulife has little sub-prime exposure, but does have more market exposure than its peers. Combining this with the fact that it reports its figures in "Loonies", which has hurt them with the Canadian dollar gaining against the greenback, this is the main reason for its decline.

Manulife has a great history of raising its dividend. Like Power Financial, it has raised its bi-annually on a few occasions.

Based on a 14x multiple, and earnings expected in the $3.35 range, look for this stock to head to the Mid-40's before this time next year.

3) Scotiabank (BNS)

Quick.....name a major bank with NO sub-prime exposure. Other than Scotiabank, there aren't too many. Instead of growing to the US, like most banks in Canada, Scotia decided to build its business in emerging markets. It now has a strong position in many countries in Latin and South America, and they have started making head-ways into Asia.

Sure, there is some risk when you deal in countries that have been known to have political instability at one time or another (Scotia did have some issues in South America in the past). However, with the ever increasing middle class in these countries, they are now getting first time exposure to many of the financial services that North Americans have taken for granted for a long time.

With its dominant franchise in Canada, its emerging markets and its increasing wealth management business (bolstered by its recent acquisition of E-Trade Canada), this is one bank that has good long term growth prospects.

With a multiple of 13x earnings, and an expected 2009 earnings of $4.40, this stock should see the mid 50's by this time next year. This would be a 10-15% upside from here. When combined with its 4.1% yield, this is a good return in this market.

4) CIBC (CM)

For those of you who like a little adventure in your investments, look at CIBC. Known as the "risk-taker" among Canadian banks, "Commerce" is definitely a place to go if you like to take a bit of risks in your financial Investing.

Known for taking on more riskier projects and investment, Commerce tends to do quite well in bull markets, but always seems to find a way to get pummeled in bear markets. Having fallen from a high of close to $110, this stock is now trading at a much more reasonable $60. Trading at an estimated 2009 P/E of about 8, this one looks to have all of the bad news priced into it.

While there might be some further right downs (again, they can be full of surprises!), look for this one to go parabolic when the credit crunch subsides.

With an estimated 2009 earnings of $7.50 or so, and a usual multiple of 12x current earnings, expect this one to go into the low $90's within a year.Yep, a 50% upside, plus a 6% yield to boot. If you have the stomach, time to get on this ride!

Disclosure: Long TSE:PWF, BNS, MFC.

Comments

[navfish]

Hi Larry,

Good analysis. One issue I had in evaluating MFC was the amount of leverage on their balance sheet compared to other insurers with similar growth prospects such as MET. Then there are other smaller growers such as Industrial Alliance. How do you look at leverage?

I did recently sell POW. I had issues evaluating the balance sheet again and the amount of goodwill that the components companies took on as part of their acquisitions. How do you look at goodwill?

BNS is the bank I own and GE is one of my top two holdings. I would appreciate your insight into the balance sheet items?

Sincerely,

Derek

[MS-ILLUSION]

Do you have someone to proof read? "Right down" for write down?