Tuesday, May 20, 2008

Which Canadian Bank Should You Buy?

David Parkinson asked this question in a recent Number Cruncher article and came up with the following result:

... which banks to buy? For that, we return to well-regarded equity quantitative-analysis firm CPMS Computerized Portfolio Management Services Inc., which has crunched the Canadian banking numbers and identified the key metrics that historically have pointed to superior stock performance.


CPMS has back-tested bank stock performance over the past 10 years against a variety of quantitative measures, and found that buying stocks with the lowest price-to-book-value (P/B) ratio would have netted investors the best bang for their buck, outperforming the group as a whole by almost 10 per cent annually.

Underperformance in the previous year – as indicated by both the worst 12-month price change and the highest dividend yield, both of which suggest a relatively low stock price – also tended to point to superior returns in the year that followed, with better than 4-per-cent outperformance of the group benchmark.

Conversely, bank stocks with the best price gains over the prior 12 months and the lowest dividend yields tended to be duds, underperforming the benchmark by the biggest margins.

You can view the complete result set on the RoB site.

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