September has been a strong month for bank stocks.
On Thursday, the share price of National Bank of Canada (NA-T) closed at a record high, and Royal Bank of Canada’s share price (RY-T) was less than half a per cent away from also closing at an all-time high.
Meanwhile, the Bank of Nova Scotia’s (BNS-T) share price still has a ways to go.
It is 11 per cent away from its record closing high set back in November of 2017. However, the stock chart looks promising with the share price on the verge of potentially forming a “golden cross..
A “golden cross” is a bullish technical signal, which occurs when a short-term moving average, such as the 50-day moving average, crosses above a longer-term moving average, such as the 200-day moving average.
When this occurs, it marks a potentially positive signal suggesting the upward price momentum may have traction.
Many traders suggest waiting until the 50-day moving average crosses above the 200-day moving average by a certain percentage, such as 3 per cent, to confirm the bullish signal. With respect to BNS, the 50-day moving average is $70.86, just below its 200-day moving average, which is currently at $71.58.
There are two other positive technical indicators.
First is the recent high volume or number of shares traded in the market. On Thursday, over 10 million shares traded on the Toronto Stock Exchange, well above the stock’s three-month historical daily average trading volume of just under 4 million.
Second, earlier this month the share price broke out of a downtrend that had been in place since early-2018. The lack of earnings growth in fiscal 2019, a series of earnings misses and uncertainty surrounding the timing of a reacceleration in the company’s earnings growth (due to acquisitions and divestures) have put pressure on the share price and multiple.
The consensus earnings per share estimates are $7.12 for fiscal 2019 and $7.50 for fiscal 2020.
The stock’s valuation is still reasonable despite the nearly 8 per cent month-to-date move higher in the share price. The stock is currently trading at a price-to-earnings multiple of 10.2 times the fiscal 2020 consensus estimate, relatively in-line with its five-year historical average of 10.3 times.
On the earnings call held on Aug. 27, president and chief executive officer Brian Johnston Porter commented on the stock’s valuation, saying: “So we’ve repurchased 10-million shares this year and we think our stock is very inexpensive here. In terms of capital going forward, I think you can think of us repurchasing approximately 4-million shares a quarter.”
Analysts’ recommendations are mixed.
There are six buy recommendations, seven neutral-equivalent recommendations, and one “sell” recommendation (from Nigel D’Souza, an analyst at Veritas Investment Research).
Analysts’ target prices range from $65 to $80. The average one-year target price is $77, implying the stock is fully valued. Individual target prices provided by 13 firms are as follows in numerical order: $65 (from Mr. D’Souza), two at $74, $75, $76, three at $77, $78, and four at $80.
BANK OF NOVA SCOTIA
Close
50-day moving
average
200-day moving
average
Broke out of a downtrend
$90
80
70
Potential Golden Cross
60
50
40
30
2011
2013
2015
2017
2019
THE GLOBE AND MAIL, SOURCE: BLOOMBERG
BANK OF NOVA SCOTIA
Close
50-day moving
average
200-day moving
average
Broke out of a downtrend
$90
80
70
Potential Golden Cross
60
50
40
30
2011
2013
2015
2017
2019
THE GLOBE AND MAIL, SOURCE: BLOOMBERG
BANK OF NOVA SCOTIA
Broke out of a downtrend
Close
50-day moving average
200-day moving average
$90
80
70
Potential Golden Cross
60
50
40
30
2011
2013
2015
2017
2019
THE GLOBE AND MAIL, SOURCE: BLOOMBERG
Jennifer Dowty