The Motley Fool

This Top TSX Stock Won’t Be This Cheap for Long: Buy Now

Image source: Getty Images

Valuations remain sky-high in most sectors. Accordingly, value seems to be confined to a few sectors right now. Financials (banks) are one sector that continues to look undervalued.

Among the Canadian large-cap banks, I think Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is best-in-class right now.

Fundamentals are everything these days

Why are banks so undervalued right now? I think a lot of this has to do with their solid fundamentals, relative to the amount of provisioning these banks have done for credit losses. When the pandemic hit, banks were forced to account for the forecast loan losses they would ensure. Given the amount of stimulus that’s been pumped into the market, it appears loan losses will not be as bad as initially thought. Additionally, I think Scotiabank has been conservative with its provisioning estimates.

Accordingly, Scotiabank could see tremendous bottom line improvement once these provisions are removed. If we exit this pandemic sooner than later, Scotiabank would be an immediate beneficiary. A rising tide would lift all boats. However, I think Scotiabank has fallen further than its peers, providing more potential upside.

Scotiabank’s 5.1% dividend yield is the best among its peers, in my view. I think this bank is poised to see capital appreciation on the horizon, lowering this yield. Scotiabank hasn’t traditionally traded at this sort of a discount to its peer group.

International growth the place to be

Fellow Fool contributor Joey Frenette likes the international growth exposure Scotiabank provides. Accordingly, in a recent piece he wrote: “Scotiabank has brilliant managers and is an easy (and probably safer) way for Canadians to gain exposure to the “growthier” international banking scene. Scotiabank stock suffered a massive 35% peak-to-trough drop in February and March, bringing shares down over 41% from their 2017 highs.

Today, the stock has since recovered a considerable amount of ground (BNS shares are up over 40% since March), but I still view deep value in the name as the world begins to heal from the pandemic in the latter part of 2021.”

I fully agree with this assessment. Canada’s largest banks with significant international exposure will benefit from a global recovery. We’re still in the early stages of this recovery now. Vaccines are being rolled out, slower than expected. However, when we do finally have visibility to the “end” of this pandemic, I think financials will start to take off. Additionally, those with high levels of international exposure like Scotiabank may outperform their peers.

Additionally, emerging markets have underperformed developed markets for quite some time. I expect a reversion toward the longer-term mean at some point. Accordingly, tilting one’s portfolio toward diversified global players may be a good move. Scotiabank may underperform the broader market for a while, but I think this stock has the potential to provide market-beating long-term returns for investors.

Like this top pick? Here are five more great options under $50 to choose from:

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.