Stock Market Genius Warns: Don’t Buy Canadian Bank Stocks!

Learn why you should stay away from Canadian bank stocks like Royal Bank of Canada (TSX:RY)(NYSE:RY) and Laurentian Bank of Canada (TSX:LB).

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stay away from Canadian bank stocks. At least that’s what one famous investor is urging.

Steve Eisman is one of the most successful short sellers in recent history. His bets make money when a company’s value goes down. He made billions during the financial crisis of 2008 by betting against U.S. housing prices.

This time, he’s coming for the banks. In 2019, he revealed bets against three companies in particular: Royal Bank of Canada, Laurentian Bank of Canada, and Canadian Imperial Bank of Commerce. He expected at least 20% drops in their share prices.

So far, Eisman has made good money on these short investments. The COVID-19 pandemic certainly didn’t hurt his thesis. Shares of the bank stocks above have fallen by more than his anticipated returns.

There’s just one problem: things are about to get significantly worse. While that’s good news for Eisman, it’s terrible news for the aforementioned stocks.

To understand this problem, we need to look back at Eisman’s original thesis. By understanding why he bet against these companies in the first place, we can see how bank stocks will fall even more by the end of 2020.

Here is the thesis

For decades, Canadian bank stocks were a marker of stability and reliability. Just take a look at the historical trading range of RY, LB, and CM stock. All handled the 2008 financial crisis with ease. All traversed the 2014 oil price crash with no long-term impact. Each stock’s dividend has also been consistent over the past decade.

Eisman’s prediction seemed ill-timed given this historical success. But it’s exactly because of this success that Eisman took his short position.

“Canada has not had a credit cycle in a few decades, and I don’t think there’s a Canadian bank CEO that knows what a credit cycle really looks like,” Eisman explained. “I just think psychologically they’re extremely ill prepared.”

Eisman is essentially arguing that there’s a sense of complacency similar to what U.S. banks faced just before the housing collapse. The COVID-19 shock, while unique, was exactly the type of even that Eisman was expecting. He knew that the good times could only last so long, and eventually, that Canadian banks would suffer from a down cycle.

Avoid Canadian banks

At the time, Eisman stressed that he didn’t foresee anything calamitous happening.

“I’m not calling for some enormous, massive losses,” he noted. “The Canadian banks are not going to have to be bailed out by the Canadian government. There’s none of that.”

Those hedges may prove unnecessary. Since those statements were made, millions of Canadians have lost their jobs, with thousands of small businesses shutting their doors for good. Many economists believe we’re still at the beginning of the economic fallout, especially if we experience a second wave this coming winter.

Canadian banks have largely maintained their dividends to shore-up cash. RBC is still paying $1.5 billion in quarterly dividends. CIBC and Laurentian Bank shares still yield 6% and 8% respectively.

If Eisman is correct and these bank CEOs are truly unprepared for disaster, those dividends will be in peril within 12 months.

Should you invest $1,000 in Bank of Nova Scotia right now?

Before you buy stock in Bank of Nova Scotia, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Bank of Nova Scotia wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

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 Ryan Vanzo has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Bank Stocks

open vault at bank
Bank Stocks

2 Banking Stocks I’d Buy With $7,000 Whenever They Dip in Price

Two banking stocks are worth buying on the dip and as reliable passive-income providers.

Read more »

Happy golf player walks the course
Bank Stocks

Tariff Turmoil Makes “Sell in May and Go Away” Seem Appealing, but Here’s Why You Should Stay in the Market

Royal Bank of Canada (TSX:RY) looks like a great dividend payer to buy in May, even as volatility stays elevated.

Read more »

A worker uses a double monitor computer screen in an office.
Bank Stocks

3 Canadian Insurance Stocks to Buy and Hold in Your TFSA for Financial Sector Exposure

In a shaky market, these insurers could offer the kind of stability and upside TFSA investors crave.

Read more »

chart reflected in eyeglass lenses
Bank Stocks

2 Reasons I’m Considering TD Bank Stock for a $7,000 Investment This April

TD Bank (TSX:TD) stock looks ready to march higher as it makes up for a last year's lacklustre performance.

Read more »

stocks climbing green bull market
Bank Stocks

Is TD Bank Stock a Buy for its Dividend Yield?

The Toronto-Dominion Bank (TSX:TD) has a nearly 5% dividend yield.

Read more »

Paper Canadian currency of various denominations
Stocks for Beginners

Why the Canadian Dollar Could Make or Break Your TFSA Returns in 2025

This dividend stock could create massive returns for you in 2025, especially within a TFSA.

Read more »

money goes up and down in balance
Bank Stocks

CIBC Stock: Buy, Sell, or Hold Now?

CIBC is down 10% in 2025. Is the stock now oversold?

Read more »

A worker drinks out of a mug in an office.
Bank Stocks

Should You Buy TD Bank Stock While it’s Below $85?

Down over 20% from all-time highs, TD Bank stock offers a tasty dividend yield of almost 5% in 2025.

Read more »