Rules of the Game: Northern Exposure

 | Jan 25, 2013 | 5:00 PM EST  | Comments
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Stock quotes in this article:

ry

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bmo

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bns

While comparing a couple of my large-cap momentum screens, I couldn't help noticing that three Canadian banks figured prominently. Generally, Canada's financial institutions fared well during the global banking crisis and subsequent recession. Despite continued risks of slowing global economic growth and slowing home sales, these stocks continued to perform well.

As with big U.S. financials, Canada's largest banks operate retail-lending units that offer home mortgages, as well as business and consumer lending. Investment banking and wealth management are also major components.

The three banks that showed up on my momentum screens were Royal Bank of Canada (RY), Bank of Montreal (BMO) and Bank of Nova Scotia (BNS). Of the three, Bank of Montreal notched the best January price gains with a 4.1% bump as of Thursday's close. Earnings growth has been solid, with gains between 8% and 38% in the past four quarters. Although the stock is trading at multiyear highs, the dividend yield is a healthy 4.5%. BMO has a market cap just shy of $41 billion. With a mature, established company of that size, you typically don't get explosive yearly earnings growth, and BMO is no exception to the rule. This year, the bank is expected to earn $6.10 per share, up 2% over 2012. In 2014, that's seen rising another 7%, to $6.50 per share.

In terms of earnings growth acceleration, Royal Bank of Canada fares well. Per-share income growth rates increased to 19% in the quarter ended in October from 5% in the quarter ended in April. The stock is up about 2% this month, trading near $61.60. Dividends grew in the past two years and yield is currently 3.9%. The stock is pulling back from its Jan. 17 52-week high of $62.43. As of Thursday, it was around 2.5% above its 50-day moving average, and 10.3% above its 200-day MA. It has sported lower-than-average volume on the pullback, a sign that a few investors are pocketing profits, rather than the masses stampeding for the exits.

Finally, Bank of Nova Scotia's chart is showing a gentle consolidation as the stock retreats from $59.18, where it hit resistance Dec. 27 and Jan. 2. This month, its price is up 0.5%. The character of trading is potentially bullish. As of Thursday, this is the third straight week of weekly closes less than 1% apart. That type of chart action signals institutional investors are holding shares, often anticipating a fresh rally in the not-so-distant future. As with RBC, volume declined as the stock moved into an area of essentially flat trade. That's exactly what you want to see as investors hold shares. Earnings growth rates ranged between 5% and 22% in the past four quarters. Dividends rose in nine of the past 10 years, with a current dividend yield of 3.9%. For 2013, Wall Street has pegged earnings per share at $5.15, a year-over-year increase of 11%. Another 11% gain is expected in 2014, to $5.70 per share.

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