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Why I’m Bullish on Toronto-Dominion Bank Despite the Downtrend

If you invest in the S&P/TSX 60, you’re likely aware of the significance of the financials sector on the Canadian economy. When we take a closer look at the “Big Five,” one stock stands out as being greatly undervalued. Toronto-Dominion Bank (TSX:TD)(NYSE:TD), , or TD, has seen a steady downtrend ever since it peaked in late February.

The cause?

TD was the subject of a CBC investigation, which looked into how TD’s employees felt compelled to sell at all costs in an attempt to meet the bank’s expectations. TD’s stock experienced the biggest single-day drop since the Financial Crisis. But what seems like bad luck for TD can be an investor’s best friend. It is widely known that many of the other major banks use similar practices as TD’s high-pressure sales tactics; in this instance, TD just so happened to be in the spotlight.

Buy the dip

The stock has fallen 8.88% per share in the last three months, at the time of writing — it has been hammered by shorts and what I believe is unjustified panic. This isn’t a case of “don’t catch a falling knife.” TD should be on every value investor’s radar. This is also a company that has increased dividends year after year with consistent growth, making it appealing for investors seeking dividends.

What about interest rate hikes and the effect on TD’s stock?

Conventional wisdom dictates when rates and banking profits rise. A research study performed between 2005 and 2013 by the U.S. Federal Reserve board, regarding 47 countries and 3,418 banks, showed a positive correlation between rising interest rates and rising bank profits.

In Canada, interest rates have been incredibly low, holding tight at 0.5% for over a year. But when we look at the statistical average between 1990 and 2017 we get an average rate of 5.93%.

We don’t know exactly when rates will rise and by how much, but it’s very likely that at some point in the near future, the central bank will slowly raise rates. Certainly, this is not without risk — borrowers could be at risk for defaulting on outstanding loans. Given the positive spread banks generate from rising rates, I would expect to see TD generating more positive earnings reports and dividend growth.

Future forecast and fundamentals

With its latest Q2 earnings exceeding market analysts’ expectations and the expected future dividend growth in the upcoming Q3 earnings reports, things look bright on the horizon. To add to the financial upside, TD has launched a review of its sales practices in the wake of the bad publicity from the CBC investigation.

A widespread expansion into the American market also provides serious growth and upside potential for TD going forward, with the company reportedly doubling its number of ATMs in the state of Florida alone. Buckle up for the future with this stock; it’s a buy and hold for the long term.

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Fool contributor Mike Frost has no position in any stocks mentioned.

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