You can probably thank the frothy derivatives market for the October correction that brought some of the hottest flying tech stocks down along with the entire market. A handful of over leveraged momentum ETFs are causing tech stocks to take most of the damage, and while some of the corrections are warranted for certain groups of overly frothy tech stocks (like Shopify and Square), quality blue-chip dividend darlings like Canada’s banks have become unfairly victimized. It’s these victims that could be due for an upside correction after the “tech wreck” has a chance to settle down.
At the top of my shopping list is Toronto-Dominion Bank (TSX: TD)(NYSE: TD), the king of Canadian banking that’s currently trading at a discount that will likely be short-lived as investors begin to gravitate back to value stocks and fundamentals, rather than gambling on pie-in-the-sky tech stocks that are mostly promise with little to offer in the way of actual earnings growth for the medium-term.
So, what makes TD Bank my favourite bank on the recent dip?
First, it’s the best-in-breed bank stock that has and will likely continue to be among the first to rebound after the dust has the opportunity to settle.
Why?
TD Bank has the best credit risk management profile of all Big Five banks thanks to management’s extra conservative lending practices that lead to “Steady Eddie” earnings streams that are less subject to unforeseen hiccups.
Moreover, TD Bank’s steady retail banking business can command lower volatility without compromising too much in growth. That means investors have the opportunity to have their cake (sustained double-digit earnings growth), and the ability to eat it, too (a less volatile stock with a strong, growing dividend).
Second, a rising interest rate environment bodes well for TD Bank’s net interest margins (NIM), the spread between actual interest income and what the bank pays to its lenders or depositors. As a retail-heavy bank, TD Bank’s among the most well-positioned to profit from continued rate hikes from Bank of Canada (the BoC).
Third, TD Bank’s 42% stake in TD Ameritrade is slated to experience ample growth over the medium-term, as retail investors gravitate away from actively managed mutual funds and into the world of DIY investing.
Moreover, TD’s WebBroker is going to receive a major upgrade that’ll give retail investors in Canada even more of a reason to take command of their own investments, rather than trusting their hard-earned dollars with a “professional” human manager who may not have their best interests in mind.
Fourth, TD Bank is one of Canada’s most future-proof banks, so for investors need not fear Big Green falling behind as fintech disruptors begin causing a disturbance in the banking sector.
Fifth, TD Bank stock with a 10.5 forward P/E, and a 1.8 P/B, both of which are lower than the company’s five-year historical average multiples of 13.3, and 1.9, respectively.
Foolish takeaway
Whenever you’re given the opportunity to buy TD Bank on a dip, you should pounce on it. The bank is firing on all cylinders and will provide investors with what I believe will be the highest magnitude of dividend growth over the next decade.
If you’re a prudent investor, forget trying to catch a falling knife like Shopify on the recent dip. Stick with a stable Buffettarian investment like TD Bank and you’ll sleep safely with a “locked-in” yield of 3.7%, which is substantially higher than the 3.3% yield the stock usually commands.
Stay hungry. Stay Foolish.
