TD Bank Stock Looks Severely Undervalued Going Into the 2nd Half of 2022

TD Bank (TSX:TD)(NYSE:TD) stock has been under pressure amid the TSX Index correction but may be among the best bounce-back plays in the second half.

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The first half of 2022 is drawing to a close, and many investors are bidding it good riddance. It was the worst first half to a year in decades, and questions linger as to whether the second half will be any better, as the Federal Reserve hikes rates further, and we inch closer to that economic slowdown that everyone seems to fear and dread.

With the war in Ukraine and another potential wave of the COVID pandemic that could act as pressure points on markets in the second half, it seems like things can only get worse from here. Inflation is still scorching hot, and stagflation or a recession seems unavoidable, as consumers batten down the hatches.

In any case, investors should continue to own high-quality companies at reasonable prices. There’s just been so much damage done to markets already. Arguably, investors already expect a high chance of recession.

It’s been all doom and gloom in the first half

Whenever the outlook is so gloomy, it may not take much to lift the needle higher. Heck, sometimes it doesn’t take any good news at all to lift markets after they’ve become so severely oversold. Last Friday saw the broader markets take off, with the S&P 500 soaring over 3%.

Indeed, many will doubt the sustainability of this bear market bounce. Many were caught offside chasing prior relief rallies in the first half. Whether it’s the start of the bottoming out process remains to be seen. Regardless, long-term investors should not care about when this bear market will end and when stocks will get moving higher again.

Timing the markets is impossible, and it’s better to be a gradual buyer over time, especially after corrections, with the goal of building wealth over the course of decades.

In this piece, we’ll have a closer look at one of the best value names that may be worth buying, even if stagflation and a recession strikes in the second half. Consider shares of TD Bank (TSX:TD)(NYSE:TD), which currently yields 4.3%.

TD Bank

The big Canadian banks are simply not great to own in the face of a severe recession. In past downturns, they’ve shed well more than 20% of their value from peak to trough. If the coming recession isn’t as mild as most expect, TD stock and its peers could easily get a 50% haircut. Still, banks tend to be quick to bounce back from such severe downturns. The Big Six banks are stress-tested, with strong capital ratios and enough resilience to weather any coming storm.

Here in Canada, a recession is unlikely. Commodity prices are still incredibly high, and the Bank of Canada isn’t raising rates as quickly as the U.S. Fed. Further, TD is a quality bank that will be busy integrating its latest acquisition of First Horizons.

As loan growth takes a hit, TD will eventually fold. However, if it remains robust, while net interest margins expand, TD could prove severely undervalued. At 10.4 times trailing earnings, those betting on a soft-landing have a lot to gain with the $152 billion banking behemoth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has positions in TORONTO-DOMINION BANK. The Motley Fool has no position in any of the stocks mentioned.

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