Canadian Bank Stocks Are Severely Undervalued, Especially These 2 Gifts

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) and another severely battered bank stock that’s on sale after the recent market-wide correction.

| More on:

Amidst the recent wreckage, you should opt to buy quality blue chips on the dip rather than attempting to catch falling knife tech stocks, many of which may continue to bleed as the growth-to-value rotation continues.

When it comes to quality, you’d be hard-pressed to find anything better than the Canadian banks, all of which appear to be trading at considerable discounts to their intrinsic value after getting pummelled in the tech-led October sell-off. Banks are permanent holdings, and whenever you get a rare opportunity from Mr. Market to grab shares at a discount, you should pounce at the opportunity.

While bank stocks may suffer hefty losses in the event of a recession, they’re typically the first ones out of the gate when the next phase of the market cycle kicks in. Moreover, the above-average dividend yields offered by the banks will allow investors to continue to be rewarded for their patience as they wait for the markets to reset.

At the time of writing, all the Big Five Canadian bank stocks look ridiculously cheap and worthy of your investment dollars. But if you’re looking for the best bargain, I’ve narrowed the list down to two names: Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) and Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM).

Scotiabank and CIBC both possess attractive dividend yields that are flirting with the 5% mark. Their stocks are down 16%, and 7%, respectively from all-time highs, and as the turmoil continues, I wouldn’t wait any longer as the probability of a 10% upside correction could be in the cards for both names as tensions settle over the tech-driven sell-off that I believe will be quickly forgotten as we head into the next round of bank earnings.

Furthermore, the Bank of Canada recently hiked rates to 1.75%. If I had to guess, they’re going to follow in the footsteps of Jay Powell and the Fed as Canada plays catch-up in spite of the debt struggles of many Canadians. Higher rates are a tailwind for the banks, as they’ll be able to command greater net interest margins (NIMs). Moreover, both Scotiabank and CIBC are priced well below where they should be given each of their unique circumstances.

Scotiabank has hit some rough waters of late with some weakness in its capital markets business, and the potential implications of an emerging market slowdown doesn’t bode well for the company’s foreign segment.

CIBC, on the other hand, is firing on all cylinders with its robust, growing U.S. segment in place, and appears to be in much better shape than it was prior to the collapse of 2008. Still, the stock trades at a ridiculously cheap 8.8 forward P/E, a 1.6 P/B, and a 3.9 P/CF, all of which are substantially lower than the company’s five-year historical average multiples of 10.8, 2.0, and 6.8, respectively.

Foolish takeaway

All the banks are gifts at these levels. If you’re looking to get the best bank for your buck, you may want to consider either Scotiabank or CIBC here while their yields hover around the 5% mark.

Stay hungry. Stay Foolish.

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 Joey Frenette owns shares of CANADIAN IMPERIAL BANK OF COMMERCE.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »