The banks have been major losers this year, not just in Canada, but in the U.S. as well. While the aggregate appetite for bank stocks is the lowest it’s been in recent memory; I do think it makes a lot of sense to go against the grain in spite of all the analyst “hold” recommendations.
You see, most investors are not just gloomy on Canadian bank stocks, but also downright terrified thanks in part to famous short-sellers who’ve been “warning” the public over the steep plunge that’s to accompany the next phase of the credit cycle.
To many investors who lack a deep understanding of the business of banking, credit cycles and normalization can be as scary as a recession.
Many investors have opted to throw in the towel with the intention of asking questions later. And if you’re thinking about doing the same, you’re probably not going to be happy with your results in two or three years’ time.
Many folks seem to be expecting the worst. Analysts don’t see catalysts for the rest of the year, and anything that’s not down big-time on a year-over-year will be deemed as a positive for the most battered of banks.
Although analysts are expecting either more pain or a transitory several months for the banks, I do see compelling value to be had as move into yet another season of bank earnings.
TD Bank is regarded by many one of Canada’s most premier bank stocks — partly because it’s Canada’s most American bank, but mainly because management is all about maximizing risk-adjusted growth over the long term.
The keyword here is “risk-adjusted” because TD Bank’s management team is more about getting the most return per unit risk taken on, rather than maximizing growth at any expense to pull ahead of its peers in cyclical upswings.
Astoundingly, TD Bank has not only fared better during turbulent times, but it’s also posted impressive growth that’s comparable, if not better, than its more volatile peers in the space.
TD Bank’s low-volatility retail business is an anchor that keeps the ship steady during rough waters without being a burden on the bank’s growth profile either.
TD Bank has a brilliant management team that’s all about being conservative where it makes sense and making bold bets in the grander scheme of things. If there’s a bank that’s going to survive and thrive as we transition to the next credit cycle, it’s TD Bank.
At the time of writing, TD stock trades at 9.95 times next year’s expected earnings, which makes absolutely no sense when you consider the likelihood that it’ll be one of few banks that will have its swim trunks on when the tides continue to go out on the banking waters.
Warren Buffett is still bullish on the U.S. banks, and I think it’s time that Canadians took on a similar stance with a position in TD Bank — a Canadian bank with unmatched U.S. exposure on the TSX.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette owns shares of TORONTO-DOMINION BANK.