Introduction
The Bank of Nova Scotia (NYSE:BNS), also known as Scotiabank, is trading near its 52-week low today, nearly 27% below its 52-week high. The stock is undervalued, and is a good opportunity for any long-term investor who favors dividends. While we don’t see the stock as a huge growth opportunity, the historical stability of the dividend payout and the highly regulated Canadian bank environment make it a less risky investment. We feel that the price is being weighed down by a number of fears that are overblown over the long term. These overblown fears include the anticipated imminent burst of the Canadian “housing bubble”, the effect of lower oil prices on the bank’s books, and finally, its exposure to the falling euro due to its presence in Europe. The strongest bear argument that we’ve heard is the relative weakening of the $CDN. However, we are not in the business of speculating on currency fluctuations, and advise any investors to do their own research in this matter when considering buying shares in international companies.
We will begin by breaking down the company’s relative value, then we’ll analyze its “smart money” profile, and will conclude with a qualitative discussion of potential catalysts and risks. We should note here that we base our quantitative analysis purely off of academic research, thus restricting our analysis to metrics that have been empirically shown to predict stock returns. For a detailed breakdown of prominent academics and the insights revealed from their research, click here.
Valuation Breakdown
We start with a breakdown of relative valuation, as valuation metrics have been repeatedly shown to be some of the best predictive indicators. There is a reason that most of the best investors tend to be value investors. Over the long term, cheap stocks beat expensive stocks. The following breakdown shows Scotiabank’s valuation profile, looking at five traditional value metrics that have strong predictive ability:
