Canadian Imperial Bank of Commerce CM

Globe Investor article snapshot

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A Canadian bank finds its way into an outperforming global stock picking strategy

Citi global strategist Chris Montagu ranks global stocks with a combination of value and momentum factors that creates an investment strategy that has consistently outperformed the benchmark. One stock that has recently jumped into the most attractive decile is a Canadian bank.

The screen of all stocks in the MSCI All Country World Index begins with an assessment of a fair value price to earnings (PE) ratio for each company where sufficient data on expected profit growth and balance sheet quality exists. The fair value PE is then compared with the actual forward PE ratio, and companies are ranked according to attractiveness relative to Mr. Montagu’s estimate of fair value.

Stocks are then scored for three types of momentum – price, trading volume and earnings.

The strategist then combines the two screening layers to find the best aspects of each investing approach. In his words, “Momentum strategies work by exploiting the investing phenomenon whereby once a trend is established it is more likely to continue … Therefore, by equally weighting the Composite Value and Composite Momentum ranks, the combination rank is used to identify winners, but at the right price.”

Mr. Montagu listed 10 stocks climbing into the top decile of attractiveness according to his criteria. These are Broadcom Ltd. (AVGO-Q), BHP Group Ltd. (BHPLF), Canadian Imperial Bank of Commerce (CM-T ), Barclays PLC (BCLYF), Rio Tinto PLC (RTPPF), Fortescue Metals Group Ltd. (FSUGY), Bridgestone Corp. (BRDCY ), DSM Firmenich AG (DSFIY), NEC Corp. (NIPNF) and Evolution AB (EVVTY).

This investing approach was backtested to 1996. Its success was apparent in that the most attractive decile of stocks outperformed the benchmark by 0.3 percentage points monthly, and the least attractive decile underperformed by almost 0.5 percentage points monthly. More recently, a strategy of owning all of the most attractive decile stocks and shorting the least attractive decile generated a 35 per cent return over the past year.

The historic success of Citi’s investment strategy does not, of course, guarantee strong outperformance for CIBC as its stock is now merely part of a promising group of global companies. But for holders of CIBC, it must be encouraging.

-- Scott Barlow, Globe and Mail market strategist