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Should You Avoid The Bank of Nova Scotia (BNS)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards The Bank of Nova Scotia (NYSE:BNS) and determine whether hedge funds skillfully traded this stock.

Is The Bank of Nova Scotia (NYSE:BNS) a healthy stock for your portfolio? The best stock pickers were getting less optimistic. The number of bullish hedge fund bets retreated by 4 recently. Our calculations also showed that BNS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). BNS was in 12 hedge funds’ portfolios at the end of the first quarter of 2020. There were 16 hedge funds in our database with BNS positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

BRIDGEWATER ASSOCIATES

Ray Dalio of Bridgewater Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a look at the fresh hedge fund action encompassing The Bank of Nova Scotia (NYSE:BNS).

How are hedge funds trading The Bank of Nova Scotia (NYSE:BNS)?

At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in BNS a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in The Bank of Nova Scotia (NYSE:BNS), which was worth $139.3 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $24.6 million worth of shares. Citadel Investment Group, Bridgewater Associates, and GLG Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Galibier Capital Management allocated the biggest weight to The Bank of Nova Scotia (NYSE:BNS), around 4.04% of its 13F portfolio. Fairfax Financial Holdings is also relatively very bullish on the stock, earmarking 0.69 percent of its 13F equity portfolio to BNS.

Due to the fact that The Bank of Nova Scotia (NYSE:BNS) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of fund managers that slashed their entire stakes in the first quarter. Interestingly, Dmitry Balyasny’s Balyasny Asset Management said goodbye to the largest investment of all the hedgies watched by Insider Monkey, worth about $10.2 million in stock. Brad Dunkley and Blair Levinsky’s fund, Waratah Capital Advisors, also dumped its stock, about $2.8 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 4 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as The Bank of Nova Scotia (NYSE:BNS) but similarly valued. We will take a look at Uber Technologies, Inc. (NYSE:UBER), Takeda Pharmaceutical Company Limited (NYSE:TAK), Micron Technology, Inc. (NASDAQ:MU), and Target Corporation (NYSE:TGT). This group of stocks’ market values are similar to BNS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UBER 97 5084706 3
TAK 22 734533 -6
MU 94 3990785 5
TGT 54 2208909 1
Average 66.75 3004733 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 66.75 hedge funds with bullish positions and the average amount invested in these stocks was $3005 million. That figure was $240 million in BNS’s case. Uber Technologies, Inc. (NYSE:UBER) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE:TAK) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks The Bank of Nova Scotia (NYSE:BNS) is even less popular than TAK. Hedge funds dodged a bullet by taking a bearish stance towards BNS. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately BNS wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); BNS investors were disappointed as the stock returned 3.3% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.