Should You Buy Financial Stocks Now?

Surely many of you have thought that now might be as good a time as any to go on a little shopping binge and to buy yourself some bank stocks at bargain prices. Unfortunately, that little voice in your head is no longer little and now it’s screaming its head off with words such as “economic slowdown,” “U.S. subprime debacle,” “recession,” and even “depression.” So what is an investor to do? Buy back in to the equity markets at bargain prices that are still more likely to go down than up in the short term? Or wait until the dust completely settles?

Well, trying to shed some light on the issue, allow me to repeat a few reasons for having mixed feelings when it comes to buying bank stocks. In Canada, at least for the moment, banks are still considered wealth creators. However, not all banks are created equal. So the next, and more precise, question is which bank stocks should investors go for? Should it be those trading at deep discounts? Should it be those offering the highest dividend yields? Or, should it be the stocks that have generated the highest earnings in spite of the economic turmoil of recent months?

Here is where the confusion lies. Scotiabank (NYSE/BNS; Bank of Nova Scotia) is considered the best wealth creator among Canada’s big banks. Yet, shares of Toronto-Dominion Bank (NYSE/TD) have held their ground much better and longer than any of them. On the other hand, Scotiabank offers a more than decent dividend yield of 4.1%.

But what about Bank of Montreal (NYSE/BMO) and its dividend yield of 6.1%? Why is it so high? Simply, Bank of Montreal shares have suffered the most as a result of the mortgage mess in the U.S. and the bank’s involvement in it. When a bank stock suffers, investors worry that it might cut its dividend. And when there are fears concerning dividend cuts, dividend yields soar. It is as simple as that.

And then there is CIBC (NYSE/CM), the shares of which have been in a similar tailspin, as were shares of Bank of Montreal. It was a tough year for CIBC, the one Canadian bank with the most exposure to the toxic real estate market in the U.S. To illustrate, last week, CIBC finally fessed up that it has tanked over $25.0 billion into complex financial derivatives where underlying securities were some sort of loans, although not necessarily subprime mortgages. Yet, CIBC is ranked second among Canada’s big banks as a wealth creator, just behind Scotiabank, and by the skin of its teeth ahead of Royal Bank (NYSE/RY).

So perhaps Canada’s big banks are not such a great deal after all? Yes, I suppose that would be the bottom line so far in this discussion. But then, what else is out there in the financial sector that might be of interest to ordinary investors?

Well, worry not, because financials still have something to offer (on both sides of the border). For example, there are non-bank financial companies, such as small insurers and/or lenders, which have taken an even worse beating than bank stocks recently, but which have significant earnings potential, such as Power Corporation of Canada (TSX/POW) or Fairfax Financial Holdings (NYSE/FFH). Investors might also want to look into larger insurers, such as Great West Life (TSX/GWO), Sun Life Financial (NYSE/SLF), Manulife Financial (NYSE/MFC), or Industrial Alliance (TSX/IAG-PA). Just remember that our troubles are far from over, I don’t think the market has yet bottomed and, if you are a risk-averse investor, staying out of any kind of equities for just a little while longer might not be such a bad idea