After last month’s steep drop, Canada’s big bank stocks are looking ripe for the picking!
So, if you’re a contrarian investor who’s on the fence as to whether you should be a buyer of this most recent correction, you may want to err on the side of caution by nibbling away at a quality Canadian bank rather than betting on a more speculative growth play that may stand to see further losses as the growth-to-value rotation in stocks is probably not over yet.
While the Big Canadian banks are the perfect forever holdings that’ll reward long-term investors with stellar capital gains, dividends, and dividend growth, some bank stocks are more attractively valued than others given their unique circumstances. At any point in time, there’s a best bank for your buck, and today, I believe Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is this bank after falling 18% from peak to trough.
Scotiabank is arguably one of the riskier bets of the Big Five banks with its higher degree of exposure to the emerging markets that have been out of favour of late thanks in part to the high U.S. dollar. The international banking business is subject to a greater degree of volatility and uncertainty versus that of its domestic business. There’s more potential for steep loan losses in emerging markets like those within the Latin American region, but on the flip side, exposure to such red-hot growth markets will allow Scotiabank to ramp up its growth profile, which Scotiabank desperately needs as growth in its Canadian business continues to decelerate.
As I’m sure you’ve noticed, Scotiabank’s been investing heavily in its domestic marketing campaigns with long televised spots, pee wee hockey sponsorships, and arena naming rights. While such marketing efforts are a great way to capture the attention of Canadians, I believe the moves will do next to nothing to entice Canadians to switch on over to Scotiabank, especially when you consider that many of Scotiabank’s peers possess vastly superior switching incentives. Think free Apple (NASDAQ:AAPL) iPads, advanced technologies, and wide ETF lineups, among the other unique offerings that Canadians care about.
With that in mind, Scotiabank’s domestic business may stand to give up ground to the competition over the near-term, but in the meantime, higher net interest margins (NIMs) from higher rates will serve as a tailwind for Scotiabank’s less-growthy Canadian business as management continues investing in its digital efforts to reinvigorate customer engagement and keep up with the Joneses.
While Scotiabank’s Canadian business may not be attractive to prospective investors, I believe the high-flying international segment has enough strength to more than offset any stalled growth experienced domestically. The Latin American (LatAm) business continues to exhibit a considerable amount of momentum, and as management continues to pull the trigger on acquisitions while keeping expenses under control, I suspect Scotiabank could bounce back in a big way as the sell-off in emerging markets begins to subside.
Foolish takeaway
Scotiabank’s domestic operations appear somewhat inferior to that of its peers, but it’s the international segment, LatAm in particular, that’s the main attraction for investors.
With Scotiabank stock trading at just 9.5 times forward earnings, I think contrarians ought to think about punching their ticket to the show while the cost of admission remains depressed. I’m a raging bull on Scotiabank’s international growth profile, and for those with a long-term time horizon and a stomach for volatility, Scotiabank is the best bank for your buck at today’s multiples.
Emerging markets are riskier, but given Scotiabank’s exceptional stewards, I’d argue that the risk/reward trade-off is more than favourable for those seeking superior risk-adjusted returns over the next three to five years.
Stay hungry. Stay Foolish.
Fool contributor Joey Frenette owns shares of Apple. David Gardner owns shares of Apple. The Motley Fool owns shares of Apple and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple.