Somebody at the MoneyShow asked me after my talk why I had put Bank of Nova Scotia on my Top Picks list a couple of shows ago. My answer was that it certainly wasn’t trending up yet, but it has the makings of a base. Meanwhile, ValueTrend Fundamental Analyst & CFA Craig Aucoin feels it is the undervalued bank amongst the big 6. Below is the BMO Equal Wt CDN Bank ETF. You can see that the sector has been in an uptrend.
Take a look at the BNS chart below – note that I used the option on stockcharts NOT incorporating the dividend into price–which is important in a stock like BNS – given its high dividend. The stock has not been in an uptrend. It has been forming a consolidation pattern since the beginning of 2017. Support is extremely obvious at $74 -and its held very nicely since early 2017. The stock clearly doesn’t want to crack that level. Meanwhile, resistance lies in the $77-82 area. By itself, not such a great trade (5% gain plus dividend) had you bought at $74 – so far. It has currently reached the lower end of that target at $77 – which is the down-trendline of the recent move within the consolidation.
BNS it has the upside of the potential catch-up with the rest of the Canadian banks. If it breaks $77 – this would imply a triangle breakout, which can carry a stock to or above its old highs. Alternatively, if the stock breaks $74, it might imply some sort of a complex topping formation. As I have noted before – it is not important to assign the name to the topping formation (H&S or rounded top) – and its not a good idea to pre-judge a topping formation until a neckline support level is indeed broken. That support has not cracked for 2 years – and the sector is about to come into its peak seasonal period in about a month. So I’m not betting a breach of support will occur.
Fundamentally – The stock has lagged because of its exposure to Latin America, and the fact that its last quarter was not as bright as most of the other big CDN banks. The company has been acquiring money management businesses—and this is costing them money. But that can also become accretive to earnings, assuming they have made positive acquisitions. Craig feels this is the case. From a fundamental perspective, it would be expected that – at the very least, $74 support may hold up on the positive potential brought on by their new business expansion – despite growing pains. In fact, Craig feels the stock is not deserving of the degree of pullback it has experienced. It is our estimation that BNS may indeed break out and reach that $80+ target, and possibly move higher to the upside as markets recognize the value in the stock. We shall see.
Technically, the play is to sell it at $80, or higher. We would sell at a loss if $74 were meaningfully breached. Its not a sure thing, which is why it is not our only bank holding. For now, we hold the stock. Hopefully, this answers my seminar attendees question.
As a reminder – I am on Bloomberg BNN again this Wednesday at 6:00—details below.