Better Buy: Canadian Bank Stocks or Fintech Stocks?

TD Bank (TSX:TD) and the big bank stocks may prove better buys than the battered fintech firms at this juncture.

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Don’t let the broader market’s recent run steer you away from equities. Though the pace of gains in the American market (think the S&P 500 and Nasdaq 100) may not be sustainable, I think there’s value to be had in some of the more unloved sectors out there. Tech has been the talk of the town. As valuations become stretched, there’s a good chance that the relative performance could diminish.

For value-conscious investors seeking to get a great bang for their buck, I think the financial sector is rich with yield and opportunity. Of course, the March-April madness in bank stocks has left a lot of investors rattled and on the sidelines when it comes to the banks. Though U.S. regional banking woes are mostly in the past, there’s still a strong sense of unease when it comes to any once-cherished banking institution.

In Canada, the Big Six basket has really suffered, with some members falling deep into bear market territory (a peak-to-trough fall of at least 20%). Nobody knows when banks will turn. Regardless, I think it’s about time to consider them as contrarian value, even as analysts are enticed to downgrade or reduce their price targets.

The fast fall of fintech stocks

Although technology has really surged higher this year, the fintech plays haven’t really heated up to the same magnitude. The tech firms that have used “artificial intelligence” (A) repeatedly have won the love of Wall Street. And though fintech firms like PayPal (NASDAQ:PYPL) could certainly unlock the power of AI to enhance its payment ecosystem, I’m not so sure how the firm can stack up against traditional banks, many of which are also embracing AI and tech with open arms.

In the early days of digital payments, PayPal was a force to be reckoned with. Nowadays, it’s lost its edge, with the stock shedding around 80% of its value from peak to trough. At around $63 and change, PayPal stock is a far cry away from its $300 peak. Such a peak may not be eclipsed anytime over the next decade. Regardless, the once beloved fintech titan seems priced like more of a value play than a dominant tech firm.

Though PayPal’s growth trajectory doesn’t look nearly as enticing as it did during pandemic-era lockdowns, I find a lot of the “slowed growth,” and other headwinds are already a given. As a result, PYPL stock is fresh off multi-year lows. PayPal may not be as dominant anymore, but I find the current multiple of 27.35 times trailing price to earnings to be a tad too low, especially if a recession in the U.S. fails to materialize.

Big banks embrace financial technology

Meanwhile, the big banks are becoming tech-savvier with time. TD Bank (TSX:TD), a battered Canadian bank that’s down 26.6% from its highs, had a “tech day” back in March. It went mostly under the radar of investors. As a part of the bank’s tech day, it announced its intention to hire more than 2,000 tech workers.

Indeed, it sounds like TD, and your average traditional bank is en route to becoming more fintech-like with time! That’s a big deal that could further erode the dominance of the tech-first fintech firms that may continue to lose their edge.

Better buy: Banks or fintech stocks?

Though both bank stocks and fintech plays have seen turbulence in recent years, I’d have to say I’m a bigger fan of the banks. They’re still cheaper, with more upside, as they ramp up on their tech talent. Have old-school banks become the new fintechs? Possibly.

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 recommends PayPal. The Motley Fool has a disclosure policy.

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