It’s been a choppy start to the quarter, with technology companies showing a bit of weakness after a hot start. With a recession moving closer and the U.S. regional banking crisis fresh in investors’ minds, now does not seem like the time to shift back to risk-on mode.
Undoubtedly, there are plenty of risks ahead as we get a better gauge of the effect of the past year’s worth of interest rate hikes. Further, there are always risks in our blind spots that we need to be mindful of. In January, when stocks were rallying with fury, few saw the failure of Silicon Valley Bank. Nowadays, investors are more than aware of the potential interest rate risks placed on the small banks.
Though the fall of Silicon Valley Bank had very specific vulnerabilities (think all that exposure to the high-flying startup tech scene, the firm’s propensity to reach for yield in the so-called safe bond market, and improper risk management), it’s hard to shoot down the possibility of some sort of contagion. I think the contagion fears have been overblown. Over the past three weeks, we’ve witnessed very well-capitalized, blue-chip banks taking huge hits to the chin.
When risks get overblown, there are opportunities to be had
Recently, TD Bank (TSX:TD) received a lot of flack for its exposure to U.S. regional banks. The bank is also being weighed down by its exposure to the Canadian housing market. Indeed, TD seems to be the worst of both worlds for many bears who are short the stock.
As I’ve noted in prior pieces, though, high short interest is no reason to hit the panic button. Oftentimes, heavy short interest can lead to considerable upside once shorts are squeezed, and they’re proven wrong over time about their negative theses. Not to mention TD Bank also looks like an interesting merger arbitrage deal, as it weighs all options with its potential acquisition of Memphis-based First Horizons Bank — a deal that could take even longer to close.
A perfect storm seems to have hit TD Bank
Yes, TD faces pressure from multiple corners right now. However, I think it will walk away from this barrage of volatility as a winner. Its deal with First Horizons has yet to close. It has options. And you can be sure it will weigh its options carefully. Indeed, the regional banking crisis may be the bell that saves TD from a less-than-stellar deal.
TD is a great pick here, but don’t expect a V-shaped recovery anytime soon. Things like bank contagion fears do not dissipate overnight. It could take months, if not quarters, for bank investors’ nerves to calm. Also, there’s always a chance that a few more regionals go belly up. Either way, TD doesn’t seem to be the timeliest stock in the world.
However, if you seek to top-up your Tax-Free Savings Account with a high-yielding play, it’s tough to match TD stock’s value proposition right here, even in light of the new regional-banking risks that were unearthed in March.
The bottom line for investors
As well run as TD is, it’s hard to steer clear of the potholes in the road all of the time. It doesn’t matter how stellar a risk manager is. Sometimes, all the sore spots begin to ache badly at once. And I think that’s TD right now, with its unideal mix of exposure to U.S. regionals and Canadian mortgages.
The good thing about the Canadian banks, though, is that they are stress-tested and can navigate very hostile climates. The big banks are scary when the lights dim on the economy. But TD is one name worth keeping on your radar, especially if you’re a fan of yield.
Further, if TD backs away from First Horizons (and the new risks it’ll introduce), I think TD stock has a lot of upside potential, all penalties considered. Investors just hate regionals that much these days.