Saturday, November 24, 2007

now in stock

Fools know the value of a stock split: zero. It's a nonevent. Instead of a $20 bill in your wallet, you've now got two $10 bills. You're eating 12 slices of pizza that are half the size of six large slices.

So if stock splits mean nothing, why do companies do them? None of the reasons has anything to do with whether the stock is a good investment. The usual suspects:

To make the stock look cheap.
To increase liquidity.
To meet stock exchange listing requirements.
To express a bullish management attitude.
No matter what the reason, the market tends to view stock splits as positive, and a company's shares can get a short-term boost from the event. But if the business isn't a good, long-term company, it makes no difference if its shares split or whether you buy them before or after they do.

A split decision
That's why we pair stock-split announcements with judgments from the more than 75,000 investors at Motley Fool CAPS. Every day, professional and novice investors rate the prospects of thousands of stocks, resulting in a rating between one and five stars (five being the top). If the best stock pickers think a company's long-term performance is outstanding, and the company has announced the bullish signal to split its shares, we take notice. We dive in to find out what the CAPS community has to say about some of these companies.

Here are four companies that North American markets recovered well through the end of October but recently pulled back sharply, rattling investors.

So far this month, both the Toronto Stock Exchange and the Dow Jones Industrial indices are down approximately nine per cent.

The write-downs of mortgages in the U.S have savaged financial stocks in particular but have also brought down other sectors on growing worries that the U.S. could slip into a consumer-led recession.

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Font:****Over the last week, Bank of Montreal declared it is booking $530 million in write-downs, Royal Bank will record a $480-million, fourth-quarter charge on U.S subprime mortgage losses, while Scotiabank will book $190 million, and CIBC will write down $463 million.

This week, Royal Bank shares traded below $49 dollars a share. Only a month ago, Royal Bank was trading at $56.

Royal Bank has 1.28 billion shares outstanding, so its market capitalization has fallen a staggering $9 billion dollars in a month.

Is the stock oversold? Is this the biggest buying opportunity of a lifetime?

Yes and yes.

Bank of Montreal's market capitalization has fallen $5 billion and CIBC has lost over $6 billion in market capitalization.

Indeed, all of the Canadian banks are oversold, but I believe Royal Bank offers the best value if I have to choose just one.

At $48.90, Royal Bank's $2 dividend now yields over four per cent and the stock is now trading at 10 times next years earnings.

Out of the top 18 banks in North America, Royal Bank is the sixth largest in market capitalization, ranks fifth in earnings per share growth year over year, and third in return on equity.

Canadian banks will begin reporting earnings on Tuesday, leading off with Bank of Montreal, while Royal Bank reports on Nov. 30.

The write-downs announced by the banks are very modest at only 1.5 per cent of common equity and pale in comparison to a number of global players.

However, the market's reaction has been so severe, Canadian banks have lost $38 billion in market capitalization or 27 times the amount of the write- downs.

We feel this is the best buying opportunity we have seen in the banks in five years. The Joneses have acquired more Royal Bank shares this week.

n Kevin Johnston is branch manager and associate director of ScotiaMcLeod but the views expressed are his own.


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