The Globe and Mail published an article on Sept. 23 that discussed the terrifying — and highly profitable — journey of a bank stock. The bank in question was Royal Bank of Canada (NYSE:RY), Canada’s largest company and arguably one of North America’s best bank stocks to buy.
Although the article is behind a paywall — I’m a subscriber — I can give readers the gist of Globe contributor John Heinzl’s article.
Heinzl assumes that an investor bought 10,000 Canadian dollars of Royal Bank stock on Sept. 21, 2002, and held it for the next 20 years, adding no additional contributions over the two decades. While it got hit on two occasions: Late 2008 into 2009 (financial crises) and March 2020 (Covid-19), it ultimately delivered an annualized total return of 12.45% over 20 years.
Your 10,000 Canadian Dollars would be worth 104,618 Canadian dollars. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) had an annualized total return of 9.7% over the same period, 280 basis points less.
Canadian investors love their bank stocks because of the dividends. American investors aren’t much different.
Here are three bank stocks to buy that will deliver income and capital appreciation over the next 20 years.
|CM||Canadian Imperial Bank of Commerce||$43.35|
|RYF||Invesco S&P 500 Equal Weight Financials ETF||$50.88|
Canadian Imperial Bank of Commerce (CM)
While I considered selecting Royal Bank as one of my three bank stocks to buy, I went with Canadian Imperial Bank of Commerce (NYSE:CM), the underdog amongst Canada’s Big Five banks.
Canadian Imperial Bank of Commerce, or CIBC for short, is relatively unknown to American investors. Canada’s fourth-largest bank, its U.S. business took a big step forward in 2017 when it acquired Chicago-based PrivateBancorp for $5.0 billion in cash and stock. It was rebranded under the CIBC name shortly after the acquisition’s closing.
As a result of the acquisition, the U.S. now accounts for 20% of the bank’s overall earnings. Its goal is to get the number up to 25% over the next few years.
As Michael Sprung, President of Sprung Investment Management, pointed out recently on BNN Bloomberg TV, CIBC trades at a price-to-book ratio that is less than every other one of Canada’s major banks — This includes National Bank of Canada (OTCMKTS:NTIOF) along with the Big Five — and yields a high 5.4%.
The six analysts who cover CM stock in the U.S. give it an average rating of overweight — three buy, two overweight, and one hold — with an average target price of $65.42. This represents 47% upside to where the stock is currently trading.
If banks are your thing, CIBC is a Canadian diamond in the rough.
Invesco S&P 500 Equal Weight Financials ETF (RYF)
I wanted to include a U.S.-listed equal-weight bank ETF, but as far as I know, there isn’t one. Bank of Montreal’s Canadian ETF business has an equal-weight bank fund — BMO Equal Weight US Banks Index ETF — but it’s listed on the Toronto Stock Exchange. The ETF holds 16 bank stocks, including my favorite U.S. bank, which I’ll discuss below.
As a result, I’ve selected the Invesco S&P 500 Equal Weight Financials ETF (NYSEARCA:RYF), which tracks the performance of the S&P 500 Equal Weight Financials Index. The index has 66 financial services stocks from the S&P 500. Bank stocks account for 27.16% of the ETF’s $398.8 million total net assets.
As for the size of bank stock, the average market capitalization is $56.0 billion, with large caps accounting for 45%, and mid-caps making up the remaining 55%. The top 10 holdings of this ETF include two bank stocks — M&T Bank (NYSE:MTB) and Regions Financial (NYSE:RF).
When picking winners in the financials, healthcare, and technology sectors, you’re often better to buy an ETF and let a rising tide lift all boats.
As for why I picked an equal-weight financial services ETF, the market cap-weighted version of the S&P 500 — The Financial Select Sector SPDR Fund (NYSEARCA:XLF) — has Berkshire Hathaway (NYSE:BRK-B), JPMorgan Chase & Co. (NYSE:JPM), and Bank of America (NYSE:BAC) accounting for more than 30% of its total net assets.
I don’t have a problem with any of the three stocks, but you’ve got to be confident they will be the winners over the next 20 years because if they’re not, you will badly underperform the S&P 500.
SVB Financial (SIVB)
SVB Financial (NASDAQ:SIVB) has been hit the hardest of my three top bank stocks to buy picks. It’s down more than 51% year-to-date compared to -23.9% for CIBC and -20.5% for RYF.
Investors have been especially harsh with SIVB stock because of the bank holding company’s business model. It focuses on innovators and entrepreneurs, with much of its business done with private companies. In 2022, the correction of the public markets, combined with fears of recession, has put severe downward pressure on the private markets and valuations. That led to less business for the bank.
SVB reported Q2 2022 results that were less than analyst estimates. Revenues were $1.53 billion, $100 less than the consensus, while earnings per share were $5.60, 27% less than analyst expectations.
“Challenges in the public markets are affecting liquidity flows to private companies, and that impact is being felt down the line in private company valuations, hiring, and performance expectations,” said Greg Becker, President and CEO of SVB Financial Group.
As a result of lowered expectations, its shares are trading near a 52-week low. The last time they traded this low was December 2020.
Unless you believe that the innovation economy is dead, SIVB stock provides aggressive investors with an excellent entry point for long-term gains.
In December 2013, I included SVB Financial in a list of The 5 Best Stocks to Buy for the Next 20 Years. It’s up 227%, 2.5x JPMorgan’s cumulative return over the same period. I expect it to do the same over the next 8-10 years.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.