Investment Observation: Bank of Montreal (BMO)

Today’s Investment Observation is Bank of Montreal (BMO).  According to Yahoo!Finance, Bank of Montreal “…provides various retail banking, wealth management, and investment banking products and services in North America and internationally.”

While there is considerable attention to the ability of Canadian banks to grow in spite of the travails of American banks, the premise of our interest in Bank of Montreal is only based on the fact that the company has a solid dividend history, near a new low and has an easily discernable Altimeter.

Bank of Montreal has a stellar dividend history which we believe the company has the ability to maintain.

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Using Edson Gould’s Altimeter, as seen below, we find that BMO is bouncing along the lower end of the range which would suggest that the stock is approaching the undervalued range.

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Whenever BMO trades above 99.24 on the Altimeter the stock should be considered for selling and anytime the stock declines below 73 it should be considered for acquisition.  Below is the track record for this indication since 1996:

Date Close Altimeter buy/sell %change
2/5/1996 12 72.73 buy 67.67%
3/10/1997 20.12 100.6 sell -15.81%
8/10/1999 16.94 72.09 buy 48.29%
12/8/2000 25.12 100.48 sell -14.21%
2/6/2002 21.55 71.83 buy 52.25%
8/26/2003 32.81 99.42 sell 61.20%
1/17/2008 52.89 72.65 buy 23.46%
4/26/2010 65.3 99.24 sell -17.53%
10/4/2011 53.85 72.87 buy ?????

In only one instance, August 26, 2003, when a sell indication was given, did the stock rise when it was expected to fall before another Altimeter buy indication was given.  The average gain after a buy indication was +47%.  This excludes any instance where the holder of the stock could have sold at much higher levels other than when the sell indication kicked in.

Dow Theory indicates that BMO has a fair value of $44.85.  This means that BMO is trading approximately 22.83% above fair value.  Our assessment of the Dow Theory fair value is based on the the trading high of 2010 and the trading low of 2009.  From the current price, BMO has the following Dow Theory downside targets:

  • $51.80
  • $37.90
  • $24.00

These downside targets are a broad overview of the potential downside risk, as each target is met we will be glad to provide intermediate and short-term downside targets.

According to Value Line Investment Survey, BMO is considered to be at fair value when the stock is trading 10.5 times earnings.  Using the most conservative figures available, full year 2011 reported earnings of $5.26, BMO would be trading at a fair value of $55.23.  From 1996 to 2011, Value Line indicates that BMO has increased the number of shares outstanding by only 23%.  This is significant because any bank that has managed to get through the banking crisis of 2006 to 2011 with such a “small” increase of shares is in a relatively stable condition.

We are reticent to recommend any kind of banking institution due to the many unexpected risks that occur outside of the purview of regulators and accountants.  However, Bank of Montreal is a reasonable banking investment if bought at the right price.  We believe that the right price begins at $51.80 and below.

One response to “Investment Observation: Bank of Montreal (BMO)

  1. What are your concerns regarding the housing bubble forming in Canada and it’s potentially adverse effects on BMO?

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