Better Buy: TD Stock or Bank of Nova Scotia

These two bank stocks have been in the news for not-so-favourable reasons, but which is worth the risk?

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Now it might confuse you as to why we’re looking at Canadian bank stocks today. If you look across our southern border, the United States has already seen some banks go bankrupt. However, here in Canada it’s a different situation.

Canadian banks have provisions for loan losses, with less competition. Therefore, they look forward to far more stable revenue. Plus, they are able to put cash aside for downturns such as this.

That being said, bank stocks aren’t immune to the current conditions, with all of them down in the last year. But when it comes to Toronto Dominion Bank of Commerce (TSX:TD) or Bank of Nova Scotia (TSX:BNS), which is the better buy?

TD stock

TD stock has long been one of the top choices among investors looking for growth among bank stocks. The company has been growing at a steady clip, expanding into credit card partnerships and across the United States.

The problem is, the bank represents a huge portion of short seller activity. Data from S3 Partners shows that short interest in TD Stock totalled $3.6 billion on Canadian markets, and $1.1 billion in the U.S. for a total of $4.7 billion. It’s the largest total short interest of any bank in the world.

The data came in early April, and so of course there has been follow up. TD stock has exposure to the potential housing downturn as well as operations in the U.S. It’s currently one of the top 10 banks in that country. Meanwhile, although TD stock is the most shorted now, other Canadian banks recently held the top spot.

So it looks like those hoping for a crash in Canadian banks may be disappointed, as they have those provisions I mentioned earlier. That being said, TD stock was also pointed at for making a poor investment in Charles Schwab, as well as having an eye on First Horizons, neither of which investors have been keen on.

TD stock now trades at 9.7 times earnings. It holds a dividend yield of 4.8%, and is down 14% in the last year.

Scotiabank stock

Bank of Nova Scotia, better known as Scotiabank, is another Canadian stock to consider. Scotiabank stock has also underperformed the market by quite a lot, yet has been a favourite in the past for its exposure to emerging markets.

However, it too has come under fire as of late. Institutions and major holders of Scotiabank stock have trimmed their holdings of the company as the market continues to perform poorly. Sumitomo Mitsui Trust Holdings recently reduced its shares by 1.7%, which came to 52,164 shares of its 3,023,965 at that point. So it certainly made a dent.

It hasn’t been the only one either, with other institutions selling stakes. But none that made as much of an impact as Sumitomo Mitsui. That being said, Scotiabank stock is still held by a large number of institutions. Currently, 39% of the business is held by its top 25 shareholders. Furthermore, over 50% of the entire company is held by these institutions.

This can mean that these institutions have sway over the company. However, it also means that analysts dug into the company and liked what they saw.

Scotiabank stock trades at 9.4 times earnings. It holds a 6.09% dividend yield, and is down about 21% in the last year.

Bottom line

Right now, if I’m only choosing one of these banks stocks, it’s going to be Scotiabank stock. At this point at least. TD stock is making headlines for its short seller problems. While these might be blown out of proportion, investor fear could lead the stock further down.

Though Scotiabank stock may have had one institution lose its hold, overall institutions like the company. It provides a huge dividend yield as well. So if you’re looking for a small stake in bank stocks right now, it’s the one I’d pick today.

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 Amy Legate-Wolfe has positions in Toronto-Dominion Bank. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

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