I am going to start this forum off with this Canadian stock. I apologize for the long read but is an awesome read! I got it out of the Motely Fool's 2008 Stocks. Please note, this was written from data on 11/9/07 when the stock was trading around $100 per share. At that time, these numbers were VERY compelling. Now, it is tracking at $67.76. This is one of the cheapest, most well positioned stockes that I have seen in a while. Please ready and comment after. I will have a couple of thoughts in a follow up post:

What a great time to be Canadian! The Canadian dollar - nicknamed the "loonie"

after the duck-like creature on the back of the country's 11-sided dollar coin - recently

traded at a 31-year high of $1.04 against the U.S. dollar (above parity!). The commodity-

based Canadian economy is booming in conjunction with record-high prices of

crude oil, metals, and agricultural products. Unemployment is at a 33-year low, and the

government's budget surplus for fiscal 2006/07 came in at a whopping $14 billion, 50%

higher than expected. Even better, the Organisation for Economic Co-operation and

Development (OECD) expects Canada to be the only G-7 country to post a government

surplus in both 2007 and 2008. Did we mention that debt is at its lowest level in 14

years? Best of all, this economic juggernaut shows absolutely no signs of slowing down

anytime soon.

That brings us to the important question: How can we profit from these economic fireworks?

Money is the linchpin of a strong economy, so if you want to take advantage of

Canada's economic boom, banks are the perfect place to start. That's especially true in

the case of Canadian Imperial Bank of Commerce (NYSE: CM), more commonly

known as CIBC.

CIBC's impressive performance speaks for itself: In 2006, the company's total shareholder

return was 25.6%, highest among all of the major Canadian banks. CIBC

churned out an astounding 142.8% total return for the past five years, including quarterly

dividend growth of 112%. Want to go back further? In the past 10 years, CIBC's

return clocked in at 120%, beating the S&P/TSX Composite Index return by 215%. In

addition, the company has increased its dividend in nine of the past 10 years. No matter

what timeframe you look at, CIBC is a top performer.

It's also one of Canada's Big Five Banks. If you're an investor residing in the U.S.,

you might think this designation just means that CIBC is large, but Canadians know

that it means much more. You see, the banking systems in Canada and the U.S. are like

night and day: Whereas U.S. law promotes the creation of small, local banks, Canada

has always valued the stability of having only a few nationwide banks that are wellcapitalized,

provide a full range of financial services other than just retail banking, and

have many branch locations throughout the country. In other words, Canada's banking

system is a protected oligopoly with little competition, and CIBC is in this elite club.

The Big Five Banks in descending order of market cap are:

1. Royal Bank of Canada (NYSE: RY) ($72.7 billion)

2. Toronto-Dominion Bank (NYSE: TD) ($53.6 billion)

3. Bank of Nova Scotia (NYSE: BNS) (aka Scotiabank) ($52.7 billion)

4. CIBC ($34.2 billion)

5. Bank of Montreal (NYSE: BMO) ($33.1 billion)

NYSE: CM

www.cibc.com

5650 Yonge Street

Toronto, Ontario M2M 4G3

Canada

416-980-2211

Share Price: . . $102.14

Shares Outstanding: . . . . . . . . . 334.6 million

Market Cap: . . $34.2 billion

The Canadian government has resisted calls to let the Big Five

merge, but the disparity in size between banks outside of Canada

(which have been allowed to merge) and Canadian banks has

grown wider, leading to renewed calls for merger approvals: In

the past few years, everyone from the OECD to Bank of Canada

Governor David Dodge (Canada's version of Fed Chairman Ben

Bernanke) have presented cases for why bank mergers would be

in the country's best economic interest.

Mergers among Canada's Big Five will take place eventually.

When that happens, you'll want to own the smallest members

of that group (i.e., the acquisition targets). CIBC and Bank of

Montreal are the two smallest, and their shareholders would

likely be offered a hefty premium in any acquisition.

Another possibility for a takeover premium involves the elimination

of a cap that currently prevents an individual shareholder from

owning more than 20% of a bank's voting shares. (The cap really

throws a wrench in things if your firm wants to acquire a large

Canadian bank, for example, because having only 20% of the

voting rights wouldn't enable you to control the bank, which kills

the mood for making the acquisition.) According to Desjardins

Securities, if the Canadian government lifts this cap, CIBC is one

of the most likely acquisition targets. Getting in now before these

regulatory changes occur could be highly profitable.

Just calling CIBC a bank doesn't quite give it enough credit. It's

a financial services conglomerate with more than $300 billion in

assets, more than 1,000 bank branches, around 3,800 ATMs (see

chart below for scintillating details) and two divisions: (1) CIBC

Retail Markets; and (2) CIBC World Markets.

The retail division is the flagship business centered in Canada

(with a little Caribbean spice), servicing more than 11 million

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Bank of

Montreal

Toronto-

Dominion

Bank of

Nova Scotia

Royal Bank CIBC

of Canada

customers and offering retail banking, securities brokerage, mortgage

lending, private wealth management - and credit cards.

Why did we put that Captain Kirk-like pause before the credit

card part? Because CIBC is Canada's market leader in credit

cards, with an 18% share of card loans outstanding. Being the

leader is a good thing, especially now, because Visa, the largest

credit card network in the world, is converting from a private

membership association including 20,000 financial institutions

to a stock corporation. Member banks like CIBC have received

stock in the new corporation in proportion to their share of Visa

cards, and CIBC is the biggest beneficiary among Canadian

banks. On Nov. 9, it announced that it had received almost $500

million dollars in Visa stock.

CIBC is also expanding its retail banking franchise geographically,

having increased its holdings in FirstCaribbean International

Bank, a 100-branch bank with $12 billion in assets, from 43.7%

to a controlling 91.5% interest. Headquartered in Barbados,

FirstCaribbean provides CIBC geographic diversification that

should serve it well given the relatively mature Canadian market.

The World Markets division is centered in Canada and the U.S.

and offers investment banking services (advisory, capital markets,

research, and trading), merchant banking, and commercial lending.

In Canada, it leads in several investment banking categories:

yyNo. 1 advisor by number of deals for six consecutive

years

yyNo. 1 in deal value among Canadian advisors for six

consecutive years

yyNo. 1 in equity underwriting issues from 2000 to 2006

yyNo. 1 in structured product underwriting since 2000

Not too shabby, eh? In the U.S., World Markets is not one of the

big boys, but it is a profitable niche player, focusing on smalland

mid-cap corporate clients (see pie chart below).

It all sounds great so far, but as we learned from Harry Potter,

every good story has its dark side. CIBC ran into some trouble

starting in 2003. The company couldn't turn a profit with

Other

World Markets

Retail Markets

p a g e 6 | t h e m o t l e y f o o l | S t o c k s 2 0 0 8 : T h e I n v e s t o r ' s G u i d e t o t h e Y e a r A h e a d

Oppenheimer & Co., the U.S.-based securities brokerage it had

acquired in 1997, so it sold the business to Fahnestock for less

than half what it paid six years earlier. This followed CIBC's decision

to pull the plug on its money-losing Amicus online banking

venture with the Winn-Dixie and Safeway supermarket chains.

A couple of scandals also proved costly for CIBC: The U.S.

Securities and Exchange Commission (SEC) fined the company

$80 million for helping Enron commit fraudulent accounting and

banned its World Markets division from engaging in structured

finance underwriting for three years. Plus, prior to being sold

off, Oppenheimer had gotten involved in the late trading and

market timing mutual fund scandal. CIBC agreed to pay a $125

million fine to the SEC in 2005 to settle the mutual fund charges.

That same year, it agreed to settle a class action lawsuit over its

involvement with Enron for $2.4 billion.

Bottom line, retail banking in the U.S. was no picnic for CIBC.

The company's market cap ranking fell from second to fourth

place among the Big Five Banks, and in November, CIBC agreed

to sell off its U.S. investment banking, equities, and leveraged

finance businesses to Oppenheimer Holdings for a deferred

amount based on the next five years' financial performance.

The cleanup and rejuvenation of the bank is attributable to

Gerald McCaughey, who took charge of the then-troubled CIBC

World Markets in February 2004 and became CEO of the entire

company in August 2005. Under his tutelage, CIBC is now a

model of corporate virtue. In September 2007, the company was

recognized by the Canadian Coalition for Good Governance in

CIBC is one of the few companies to report the

individual financial goals that comprise the CEO's compensation,

and it awards the CEO bonuses one year in arrears so that

the board can consider any post-year-end adverse events (e.g.,

financial reversals caused by accounting shenanigans).

Good corporate governance is important to the investment thesis

for CIBC. A 2003 joint Harvard and Wharton study entitled

"Corporate Governance and Equity Prices" found that companies

with sound corporate governance generated superior future

returns, higher profits, and sales growth. Since McCaughey has

only been in charge since 2005, these benefits are just starting

to show in CIBC's stock price, and the stock will continue to

benefit from this shareholder-friendly phenomenon in the future.

CIBC is also an incredibly profitable bank. In the U.S., a return

on equity (ROE) in the low 20% level is considered "best of

breed." But CIBC's ROE is in the high 20% level and moving

toward the unheard of 30% mark (see chart in upper right corner).

The decline in 2005 was an anomaly due to the $2.4 billion

Enron lawsuit settlement. The trend is undeniably up and should

only strengthen given that the company is buying back its own

stock. In April 2007, CIBC's board authorized the repurchase of

up to 10 million shares through October, and the company repurchased

3.1 million shares at an average price of around $100 per

share. In November, the board authorized a new repurchase of up

to 9 million shares (approximately 2.7% of shares outstanding)

through October 2008.

Thanks to cost control and efficiency improvements, CIBC's

earnings per share have grown at a 31.4% compounded annual

rate during the past five years. Even better, CIBC is dedicated to

returning its excess cash to shareholders. The company's policy

for its dividend payout ratio is between 40% and 50% of net

income. Its earnings are growing so fast that it's had to increase

its quarterly dividend to keep up, and even after the increase,

the payout ratio is 37%, still lower than the company's target

range. Consequently, we expect more dividend increases. Also,

academic research has shown that the stocks of dividend-paying

companies outperform the general market. Stocks of companies

that increase the dividend perform even better.

Plus, CIBC has another advantage: Whereas some of the other

Big Five Banks are spending like crazy, expanding outside of

their core Canadian markets (e.g., Toronto-Dominion's recent

offer to acquire Commerce Bancorp (NYSE: CBH) for $8.5

billion and Royal Bank's plan to acquire Alabama National

(Nasdaq: ALAB) for $1.6 billion), CIBC is playing it cool and

conservative, focusing on its top-notch Canadian operations and

limiting foreign ventures to add-on investments in companies it

already knows well (e.g., FirstCaribbean). Return on capital is

the key to increasing value, and that is where CIBC shines by

focusing investments on its core business.

The last important metric to look at involves capital liquidity

and loan quality. CIBC's Tier 1 capital ratio (which determines

whether a bank is adequately capitalized under regulatory agency

definitions) is a healthy 9.7%, higher than the Big Five average,

above the company's own target of 8.5%, and far above the regu-

-5

0

5

10

15

20

25

30

Nine

months

ended 2007

2002 2003 2004 2005 2006

latory requirement of 7%. In addition, the loan-to-deposit ratio

is only 70%, which leaves CIBC with room for highly profitable

loan growth financed with its low-cost deposits.

If the key to a good investment was simply a great business, we

could just stop now and tell you to buy CIBC stock. But CIBC's

market-leading position, excellent corporate governance, high

profitability, earnings growth, and plump capital cushion wouldn't

mean squat if the stock was overvalued. Fortunately, it is significantly

model, CIBC is currently worth $138 per share, more than 30%

above its current price despite our conservative assumptions.

Although the bank's ROE is 28%, heading toward 30%, we model

in 21% initially with a quick descent to 17%.

A multiples analysis also reveals CIBC to be undervalued:

If CIBC traded at the price-to-earnings (P/E) ratio of Toronto-

Dominion, it would be trading at $133, pretty close to our excess

returns valuation of $138. Take into account CIBC's higher

earnings growth, and one could argue that its P/E ratio should

be even higher. When you combine CIBC's undervaluation with

a dividend yield of 3.3%, investing in the company right now

looks mighty attractive.

CIBC's undervaluation is partly based on fear that the regulatory

problems the company faced in the past could reoccur. As time

passes and investors realize that Gerald McCaughey is the real

deal when it comes to ethics, the "Enron discount" will disappear.

Secondly, there is fear concerning CIBC World Markets'

$1.7 billion exposure to U.S. mortgages. Due to the housing

market crisis, CIBC had to write down the value of its investments

in residential mortgages to the tune of $300 million in

the third quarter. It has announced an additional $490 million in

write-downs in the fourth quarter.

Investors fear that even more write-downs are yet to be

announced. If they don't materialize (and we don't expect they

will, given that the company has already written off 44% of

its U.S. residential mortgage portfolio, and less than 60% of

CIBC's total mortgage exposure is subprime-related), the stock

could rally significantly.

Finally, if new elections were to take place that gave free-market

Conservative Prime Minister Stephen Harper the political

mandate needed to allow bank mergers or foreign takeovers, our

valuation of CIBC's shares would increase substantially.

The Canadian economy is so strong that there is the risk that it

can't get any better or could even reverse. This would especially

hurt CIBC, because its conservative business model relies more on

the domestic Canadian market than its globetrotting peers do.

For U.S. investors, currency risk is always present. With the

Canadian loonie at a 31-year high against the U.S. dollar, a

reversal that strengthens the U.S. dollar would definitely hurt.

If the Conservative Party loses the next election, the chances

of bank merger reform would disappear, and any merger-based

speculation built into CIBC's share price would be wrung out.

Also, if the credit losses CIBC World Markets suffered from the

subprime crisis are worse then expected, the stock could drop.

Finally, the U.S. arm of the investment banking division is a

niche player that has struggled in the past and could be a drag

on future profits.

Gerald McCaughey has been such a critical and driving force

behind CIBC's emergence from scandal that we would seriously

consider selling if he were to step down. Any additional ethical

problems at CIBC World Markets would also be a deal breaker

for us, because it would mean that McCaughey wasn't as on the

ball as we think he is. We'll also be watching the company's

profitability very carefully for further improvement, because,

given CIBC's lower-than-average revenue growth, cost control

is critical for earnings growth. Lastly, if the stock were to shoot

above our fair value estimate, we'd consider selling.

The world's best investments in the past five years have

included Canadian banks, and the reasons for this remain in

place with no reversal in sight. CIBC is the most profitable

of the Big Five Banks, with a leading share in the Canadian

market, yet the stock is selling at the cheapest multiple of the

group. Furthermore, "good guy" McCaughey gives the company

the integrity and management strength to convince investors that

scandals are a thing of the past. Now is a perfect time to snap

up shares of this Canadian powerhouse before the Street realizes

that it deserves a premium valuation.

River, all great questions. Although I know most of the answers on gut or hunch, My main intention for this group was to improve my ability analyze and research so I am going to do a little home work so I can cite the answer. Obviously not all of them can be sited as a couple are only opinions but I will probably get back to you with a response this weekend. What are you thoughts on the extremely cheap valuation?

I could not agree more... I was shorting on a few ocassions and got burned by each bounce. Instead of sticking with what I thought was still a retreating industry, I panicked because I thought we must have hit bottom, sold, then watched them drop another 15 percent.

Quick question: If I look at the valuation on Yahoo Finance, it shows a price/book of .25, but if I look on Motley Fool it shows a price/book of around 2. Why is there a difference and which should I be using?