Darko Mihelic, financial sector analyst at CIBC World Markets believes there is a viable case for investors to overweight bank stocks. All but CIBC recently beat the street, and healthily. So what do you do?
Andrew Willis, Globe and Mail columnist writes:
This situation leaves analysts with two options. Door No. 1 is to tell institutional clients that the banks stock are expensive, and likely to tumble, or at least go sideways, and should therefore be under-weighted in portfolios. Much of the Street is pitching this strategy right now. It's not without risk: The banks make up a substantial portion of the equity benchmark, and if they continue to rally, anyone underweight banks will underperform.
Mihelic's case is:
On Friday, Mr. Mihelic rolled out his estimates for 2011 earnings at the major Canadian banks. His crystal ball says the banks will, on average, see their profits rise 27 per cent from what they are expect to post in 2010.
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āValuing the bank stocks on reasonable valuation parameters, the group appears to have approximately 17 per cent total return upside from current levels, on average.ā
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āNear-term challenges could affect the stocks since the group "looks" expensive on fiscal 2010 estimates,ā said Mr. Mihelic. ā. However, we believe investors can go overweight with the group and use short-term noise as an opportunity.ā
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