You generally invest in individual stocks with the aim of outpacing broader market returns. So, it’s essential to identify companies trading at a discount and armed with strong fundamentals. As oil prices soared to multi-year highs, energy stocks on the TSX generated outsized returns to shareholders in 2022.
For instance, shares of Suncor (TSX:SU) have more than doubled between January 2021 and December 2022. However, the performance of energy companies is tied to the price of oil, making them vulnerable right now, especially if the economy enters a recession.
After reporting record profits in 2022, analysts expect Suncor’s adjusted earnings to fall from $8.34 per share last year to $5.63 per share in 2023. Down 28% from its 52-week highs, shares of the TSX giant might decline further if oil prices move lower in the next 12 months.
Similar to energy stocks, companies part of the banking sector are also feeling the heat. The collapse of several regional banks in the U.S. has dragged the valuations of TSX bank stocks lower year to date.
But compared to their peers south of the border, Canadian banks are fundamentally stronger, allowing them to thrive across economic cycles. One such cheap TSX bank stock that should be on your shopping list is EQB (TSX:EQB). Let’s see why it is a much better bet compared to Suncor Energy.
The bull case for EQB stock
Valued at a market cap of $2.5 billion, EQB is a mid-cap stock with $105 billion in assets under management. It ended the first quarter (Q1) with $32.4 billion in total deposits, 95% of which are fully insured.
EQB is the largest securitizer of CMHC (Canada Mortgage and Housing Corp.) multiunit mortgages, and two-thirds of its commercial loans under management are assured by the government body. Moreover, its uninsured commercial loans require personal and corporate guarantees.
Loans to office properties account for less than 1% of total bank assets, with an average LTV (loan-to-value) ratio of 59%. These office properties are primarily occupied by doctors, dentists, and other service providers vital to the delivery of patient care, who can’t be displaced from the work-from-home trend.
Commercial banking accounts for 50% of EQB earnings, while exposure to cyclical verticals such as hotels, shopping malls, and retail is less than 1% of assets.
What’s next for EBQ stock price and investors?
EQB stock went public via an initial public offering back in March 2004. In the last 19 years, it has returned almost 700% to shareholders after adjusting for dividends. In this period, the TSX Index is up 320%.
Despite its outsized gains, EQB stock also offers shareholders a dividend yield of 2.2%. These payouts have risen by 20% in the last 12 months, despite a challenging macro environment.
Priced at 6.2 times forward earnings, EQB is among the cheapest bank stocks on the TSX. Analysts expect its earnings to expand by 20% annually in the next five years, showcasing the resiliency of its business model.
Analysts remain bullish on EQB stock and expect shares to surge around 30% in the next 12 months.