Why The Bank of Nova Scotia Is Set to Outperform Toronto-Dominion Bank

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is one of Canada’s most popular stocks to own. But you’re better off with The Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).

| More on:
The Motley Fool

Over the past year, shares of The Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) have not performed particularly well. During that time, they are up not quite 6.5%, easily the worst of any big five bank. Leading the pack is Toronto-Dominion Bank (TSX: TD)(NYSE: TD), whose shares are up over 18% in the past year.

But there are reasons to believe that next year will be a different story. Below are three reasons why.

1. The worst performing bank

Over the past 15 years, you could have employed a very simple strategy, and make outsized returns by doing so. All you needed to do was buy the bank stock that had performed worst the previous year. If you had done this, you would have handily beat the S&P/TSX Capped Financials Index.

The reason is very simple – in the Canadian banking sector, investors tend to overreact to short-term trends. And in the longer term, the banks usually revert to the mean. For example, perhaps the best time to buy TD was after a disastrous year in 2002. Since then, the shares have outperformed handsomely.

So if history is repeating itself, then now might be a perfect time to buy Bank of Nova Scotia.

2. Emerging markets vs. USA

This year has not been a kind one to emerging markets stocks. As a result, Bank of Nova Scotia’s emerging markets exposure has not helped its share price. In fact the shares were down 8% in January alone.

But the bank’s exposure to emerging markets is limited to strong, growing economies like Mexico, Colombia, Peru, and Chile. So it’s quite unfair that the shares were punished by an emerging markets sell-off. Meanwhile, TD is heavily exposed to the U.S. market, which is far more competitive and less profitable.

So arguably, Bank of Nova Scotia’s greatest strength is perceived as its greatest weakness.

3. Price

Thanks to Bank of Nova Scotia’s lagging stock price, you can now pick up the shares for a nice bargain.

To illustrate, the shares trade at only 11.6 times earnings. Remember, this is a company that earns almost half of its income in high-growth international markets. You’ll have a tough time finding other stocks with such growth prospects trading so cheaply.

Meanwhile, TD trades at 14 times earnings. Granted, there are reasons to like TD – it has a fantastic track record, is arguably the lowest-risk bank, and should benefit from an eventual recovery in the United States.

But given where each of these companies are, Bank of Nova Scotia should probably be more expensive than TD. Until that’s the case, you’re better off buying Bank of Nova Scotia.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Investing

money cash dividends
Dividend Stocks

2 Under-$10 Dividend Stocks I’d Buy Right Now

Here's why low-cost dividend stocks such as Decisive Dividend should be part of your shopping list in 2024.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Worry-Free Dividends: 3 Stocks for Canadian Investors

These three Canadian stocks can help you earn worry-free dividends irrespective of market conditions.

Read more »

Canadian Dollars
Dividend Stocks

5 Stocks You Can Confidently Invest $500 in Right Now

These five stocks are all some of the top businesses in Canada, making them stocks you can buy confidently in…

Read more »

movies, theatre, popcorn
Investing

Cineplex Stock Looks Like a Steal at $8 and Change

Cineplex (TSX:CGX) stock is starting to look like a great deal as it looks to add to its recent swing…

Read more »

Woman has an idea
Dividend Stocks

The Smartest TSX Dividend Stocks to Buy With $1,000 Right Now

Here's why blue-chip TSX dividend stocks such as BAM and BMO should be a part of your shopping list in…

Read more »

stock data
Dividend Stocks

TFSA Pension: 1 Great Canadian Dividend Stock to Own for Growing Passive Income

This TSX dividend stock is down 35% from the 2022 high. Is it finally oversold?

Read more »

Investing

The Top 5 Movers on the TSX in May

If you're looking for the best of the best, these five have been the top performers in May of this…

Read more »

question marks written reminders tickets
Dividend Stocks

Can You Earn $250 a Month With Dividend Stocks?

These three dividend stocks could help you earn a stable passive income of over $250/month.

Read more »