Contributor C. Cheng Asks:
“What are your concerns regarding the housing bubble forming in Canada and it’s potentially adverse effects on BMO?”
Our Response:
The timeliness of this comment regarding Bank of Montreal (BMO) is critical. On June 7, 2012 (found here), we posted an Investment Observation on Bank of Montreal which was one of our leading considerations as an investment opportunity. Keep in mind that our interest in BMO came after a 14-month declining trend in the stock’s price.
At that time we said the following of BMO:
“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.”
Unfortunately, BMO never fell below $51.80. In fact, the day that were did our write up on BMO it only fell below the $53.57 price on the five subsequent trading days immediately afterwards, with the lowest price being $52.15 on June 11, 2012.
At the moment, BMO’s stock price has retested the previous high set in November 2013.
If there is a concern that Canadian real estate is in a bubble then it would be wise to sell only the principal in BMO while leaving the profits to compound. This would eliminate the guesswork associated with determining if there is a bubble. The remaining funds would be allowed to compound at a 5.50% rate until BMO has sustain a similar decline in price from April 2011 to June 2012.
