It’s been such a rocky start to the year, but don’t let that deter you from putting any excess cash in your TFSA or RRSP to work. While U.S. markets have been off to a tough start, the TSX Index seems relatively unscathed, thanks in part to the greater abundance of value plays versus high-multiple growth names that are so common on the Nasdaq 100. With the Bank of Canada (BoC) now contemplating a 50 bps (double) rate hike for one of its next meetings, the financials sector, which makes up a huge portion of the Canadian stock market, could be in a spot to get its foot off the ground.
Undoubtedly, the big banks may be one of many intriguing long-term plays for new investors to get started with after their recent hiatus. Not only are higher rates good news for the net interest margins of the big banks, but corporate loan growth may also be more robust than expected as the global economy moves out of the worst of the COVID crisis.
Higher rates ahead, but the economic foundation seems strong
Indeed, it’s tough to imagine a scenario where the U.S. Fed or BoC hikes rates to fight inflation, only to propel the economy back into a recession. It’s a tricky tightrope to walk for the central banks, but I think they’ll find the right balance in 2022. And it’s this right balance that I believe will allow the big banks to thrive as they look to add to their impressive gains.
It’s not just the big banks that stand to benefit from the current environment. The insurers and other misunderstood value plays could also get a nice jolt from here, as the value trade heats up at the expense of the cooling “growth at any price” trade that dominated the headlines ever since the stock market bottomed out back in March 2020.
Without further ado, please consider TD Bank (TSX: TD)(NYSE: TD) while it’s fresh off a correction. With the big Canadian banking plays taking a little bit of a breather from their rallies going into spring 2022, I think now is as good a time to step in before the price of admission goes way up on the back of greater industry prospects and much higher earnings.
TD Bank
TD Bank stock is currently trying to find its footing after a nearly 11% drop from peak to trough. In comparison, most of the Big Six peer group avoided falling officially into correction territory (that’s a 10% drop). What went wrong with TD Bank stock? TD’s First Horizon deal likely didn’t help the cause. The First Horizon deal provides the Canadian bank with a nice foundation in the southeast U.S. region. While the deal gives TD an intriguing new market to spread its wings into, it also did not come cheap, at US$13.4 billion.
I think investors should give TD the benefit of the doubt. Indeed, integrating the bank could weigh down the financials over the medium term, but the longer-term rewards seem more than worthwhile, given the calibre of TD’s managers. It’s been a while since TD backed up the truck on a huge deal. They’d only do such if they’re incredibly confident that they can produce more value for shareholders. Given the rising-rate environment that’s up ahead, I’d argue that TD’s recent slide is mostly unjustified.
The stock goes for 12.7 times trailing earnings at writing, which is pretty much in line with the peer group. With a 3.5% yield and solid capital gains potential, I’d look to be a buyer of the dip, as the name may be in a spot to see new highs by the summer, with the growth-to-value rotation in full swing.
