Of all the big Canadian banks, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) has been punished most harshly over the past few months, but did shares really deserve to be hit with such a harsh correction?
At the time of writing, shares are down of 17% from its highs, and the dividend yield at 5.42% is close to the highest it’s been in recent memory. Of course, the big discount on shares and the above-average yield is yours only if you’re willing to hold the baggage that comes with an investment in CIBC.
The only question is whether it’s worthwhile for investors to hang on with shares near 52-week lows or if the risks of being left holding the bag is too high given the unfavourable macro trends.
Short-sellers have been picking on CIBC again, but as investors in the Canadian banks, we’re all too familiar with betting against these overly bearish banks doomsdayers.
While dents in CIBC’s armour were worrisome in the first two quarters of the year, I do think we’ve come to a point where investors can either pick up shares at the ridiculous discount, locking-in the higher yield by doing so, or risking a potentially large upside surprise should CIBC reveal a quarter that shows less bleeding that many bears have been calling for.
Being a contrarian isn’t easy, but it’s times like these where it’d seem “foolish” to buy shares when the best investments are made. Right now, most analysts have downgraded CIBC to a “hold” rating, which essentially means sell in sell-side analyst lingo with the expectation that further credit decay, higher expenses, and sluggish loan growth will continue on into the year-end.
CIBC is greatly exposed to uninsured domestic mortgages, and while the housing market has seen a few cracks, I’m not buying an implosion despite short beliefs that the bank is ill-prepared for the next phase of the credit cycle. After flirting with bear market territory, I do think most of the damage is already in the rear-view mirror and that any small improvements could warrant a big rally.
In any case, CIBC looks has a terrific risk-reward trade-off, with shares trading at eight times next year’s expected earnings. If you can endure a bit of short-term pain, the potential long-term gain is looking quite sizeable.
Stay hungry. Stay Foolish.
