The Canadian banks could really use some sort of catalyst after hovering around in limbo for quite a while. While I think that long-term passive-income investors will do well by picking any one of the so-called Big Six banks at today’s valuations, I think there’s a better risk/reward scenario to be had with some of the group’s more undervalued names. Indeed, we’ll check out the top two of the six in this piece, which, I believe, can outperform over the next two to three years.
Of course, the magnitude of headwinds hitting the Canadian banks could last for many quarters to come. That means earnings weighed down by further provisions for credit losses, among other issues that have been caused big bank stocks to sag. One has to imagine that many of the headwinds (many of which have been on investor radars for years) are already factored into the share price today.
Whenever you have such low expectations, there may be an easier time to hit the high road again. So, without further ado, here are two top picks for those looking to play a big bank bull run over the next 18 months and beyond.
TD Bank
Things can’t seem to go right for TD Bank (TSX: TD), which tumbled around 6% on Friday’s hideous session as more details were shed on the fallout of the money laundering probe. Undoubtedly, the bank is setting aside around US$450 million to prepare for potentially stiff penalties.
Some analysts think that it could be harder for TD to do business and make deals moving forward, which could have a longer-lived impact on its growth. Personally, I think the reputational hit could be the biggest concern for long-term investors. However, if the bank acts quickly to make right its past wrongs, I think it can return to the right track from this latest crisis.
Personally, I think it’s about time that TD announced more details surrounding succession planning. This company needs a big change of face after its latest downfall. Such big changes to the C-suite may help investors regain their confidence in TD stock.
Undoubtedly, the recent probe is a nasty stain on a premier bank, and it won’t be easy to clean, at least not anytime soon. That said, I think the issue is fixable. In any case, investors are getting a steal of a deal with shares right here, with a dividend yield of around 5.2%.
Further, I view strong support in the $74 range for dip-buyers looking to trade TD stock over the coming weeks.
Scotiabank
Scotiabank (TSX: BNS) has a fat 6.7% dividend yield and a mere 10.5 times trailing price-to-earnings multiple. Unlike TD, the stock rose more than 1% on Friday, as TD stock tanked. Though there may be a lack of year-to-date momentum, I see the bank’s Latin American business as a potential growth booster over the course of the next decade.
Indeed, emerging markets are growthier, but when times are tough, they can really hurt performance. In any case, I think the stock’s too cheap, making it a great buy for investors looking for yield and long-term appreciation. Don’t sleep on the $78.4 billion financial powerhouse, especially while the yield is hot!
