Screening for bargains in the financial sector

What are we looking for?

Let's look for the best value in the Canadian financial sector.

More about today's screen

The Canadian financial sector held up relatively well during the last downturn and actually rewarded investors well coming out of the depths of the 2008-09 crisis. It rose 42 per cent in the three months after the end of February, 2009, and 70 per cent six months after that February month-end.

Morningstar CPMS, an equity research shop, calculates that the sector is trading at a median price-to-book value of 1.16 times, a median trailing price-to-earnings ratio of 12.8 times, a median forward price to earnings ratio of 11 times and a median dividend yield of 4.4 per cent.

The last time the financial sector was this cheap on a price-to-book value and price-to-earnings basis was during the 2008-09 financial crisis and before that, the dot-com bubble of 2000, said CPMS senior consultant Craig McGee.

Today, let's look for the top 10 stocks in the Canadian finance sector with the lowest price-to-book value, lowest forward price-to-earnings ratio for 2012 and high dividend yields. Each of these factors was equally weighted in choosing the stocks and the minimum market cap was set at $1-billion.

More about CPMS

CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus more than 2,200 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

What did we find?

The list is a mix of banks and insurance companies, with some large and some smaller. Three of the big banks made the list, including Bank of Montreal , Canadian Imperial Bank of Commerce and Toronto-Dominion Bank .

Many of the Canadian financial stocks have held up very well this year compared to U.S. counterparts due to their more stable operations and strong balance sheets, Mr. McGee said. "A close eye should be kept on the next round of earnings to see how expectations will change – many of the insurance companies will report in early November and the big banks in early December," he said. "If the group can meet or exceed expectations we may see valuations start to revert to more normal levels."