Friday, April 27

BMO trading loss - buying opportunity?

Look what's in the news today...

TORONTO, April 27 (Reuters) - Bank of Montreal said on Friday
that its second-quarter results will be stung bypretax commodity trading loss
between C$350 million ($312.5million) and C$450 million after changing
conditions hurt its positions in natural gas.

Canada's fourth-biggest bank, which estimates the impact between 45
Canadian cents to 55 Canadian cents a share, said the energy market, primarily
natural gas, became more illiquid while volatility fell to historically low
levels.

The bank, which said it also changed the way it estimated the market value
of the portfolio, will "reposition" it to a lower level and take less trading
risk.

Shares fell about 2 percent, or C$1.32, to C$69.95 on theToronto Stock
Exchange soon after the market opened.


So I'm reading this as a $1.32 drop on a $0.45-0.55 impact. Sounds like a gap to me...
Is anyone buying at this price? Please post a comment!

12 comments:

Mike said...

So I'm reading this as a $1.32 drop on a $0.45-0.55 impact.

I'm no expert but I'm not sure if you can correlate a drop in share price too closely with the drop in earnings for one particular period. The share price should reflect present value expectations of all future earnings so if one particular period has lower earnings it shouldn't affect the price that much. In this case other factors like concern about how competently the company runs their business and manages risk might be bigger factors affecting the price.

the money diva said...

mike,
You make a good point, I am probably committing a logical error by connecting the two. It just goes to show that there is much to be learned about this field!
MD

NonyMous said...

Hello Money DIva
i was told by Monty to tell you that i have signed up for the tour..nice blog by the way !!

MillionDollarJourney.com said...

Diva, technically speaking, large gap downs are usually followed by a further down move.

FT

FinancialJungle said...

Testing. I think my previous comment was discarded. Due to spam filter perhaps?

Investoid said...

I blogged about this as well. It opened pretty low and presented a good opportunity for day traders, who would have made $0.50 a share on the open vs. close. That amount was eliminated within 15 minutes of the opening bell though. It still closed over 1.7% down.

In the medium term, it's probably a decent entry point. It's not my favourite bank so I don't cover it that much.

the money diva said...

FJ - I didn't receive a previous comment and they are all moderated personally by me. Not sure why it didn't make it though but please feel free to resubmit!

MDJ - I don't really understand technical analysis very well and it hasn't been my focus of late but this is a useful comment because it tells us to keep watching.

Investoid - read your article too! Would you care to share the way you chose your "favorite banks"?

Thanks for the comments everyone!
MD

FinancialJungle.com said...

No problem. I was justing giving BMO's 3.9% dividend yield a two-thumbs up for long term dividend investors. I was lucky to buy it back when the yield was 4.1%, but sometimes being too cheap means you'll watch the dividend increases flash by before your eyes.

The point of value investing is to look for contractions due to short-term fears. Remember CIBC regarding the Enron scandal? That was the best time to buy CIBC. As Mike said, the trading loss only affects 1 quarter. It doesn't change the long-term outlook for BMO.

I don't have a strong bias toward any banks. Maybe BNS a little since they're more international, but I'll pick up any on bad news, if I think the smoke will clear.

Personally if I don't already have BMO, I wouldn't procrastinate. At least average in by buying half now.

Anonymous said...

in the last ten years, it has paid to invest in the cdn. bank that went down on bad news. TD, CIBC, Enron, BNS Argentina, ect. own Royal Bank, BNS, BMO, CM. and in the past have done options on TD. banks are good long term investments. in the short term close to fully valued.
shepherd

Outroupistache said...

Those who thirst for more can read another blog called Canadian Banks & Insurance which has some long articles on the $450 million embarassment.

BMO has long been considered a takeover target should the government ever allow mergers to go ahead ... but there seems little likelihood of that happening right now. Though I own some BMO, I still prefer RY and BNS. Their superior long term growth (if continued) will more than make up for a one-day 1.7% drop on BMO.

FinancialJungle said...

>>"Though I own some BMO, I still prefer RY and BNS. Their superior long term growth (if continued) will more than make up for a one-day 1.7% drop on BMO."

Based on PE ratio, the market has high hope for RY and BNS. With the bar set so high, any hiccup will send these stocks tumbling. Conversely low expectation for BMO makes it a more conservative stock. Since it's already priced in to the price, any dismissing is double-counting. BMO's higher dividend yield means you can drip more shares to make up for the (anticipated) slower growth.

Mike said...

Thanks for link Outroupistache.

You mentioned that the long term growth of RY & BNS is superior to BMO. Do you have historical dividend growth numbers? I was under the impression that all the banks had pretty good div growth over the last ten years although some are better than others. Are you referring to growth prior to 10 years ago?

From a Globe article (Carrick) the 10 year div growth rates for the banks are: BNS 16.34%, RY 15.77, TD 13.11, BMO 12.51, CIBC 10.84