Buying quality TSX stocks on big pullbacks takes courage and requires the patience to ride out additional downside, but the strategy can also deliver meaningful long-term total returns when market sentiment shifts.
TD Bank
TD (TSX:TD) trades near $80 per share at the time of writing compared to $108 in early 2022. The stock is up from $74 in June.
Bargain hunters started to move into the stock in recent weeks on the hopes that recent rate cuts in Canada and anticipated rate cuts in the United States will make life a bit easier for troubled borrowers and will halt the rise in provisions for credit losses (PCL) reported by TD and its large Canadian peers in recent quarters.
Falling interest rates will have a negative impact on net interest margins, but the reduction in the number of loan defaults should more than offset that hit. TD’s Canadian residential mortgage portfolio in Canada is significant and a drop in rates will help reduce the pain for thousands of homeowners with fixed-rate mortgage renewals coming up over the next two years.
South of the border, TD is dealing with scrutiny by regulators over the bank’s systems for detecting and preventing money laundering. TD has already set aside US$450 million to cover potential fines. Analysts speculate the penalties could go as high as US$4 billion. At that level, the bank would see a good chunk of its excess capital get wiped out and could even be forced to issue stock to raise funds. Until the U.S. regulatory issues get put to bed, there will likely be a headwind for TD’s share price. A dip back to the 12-month low is certainly possible if more bad news emerges south of the border or if unemployment soars in Canada due to a recession.
That being said, TD already looks cheap and remains very profitable. The bank will eventually get things back on track in the American business, and investors who buy TD stock at the current level can pick up a solid 5% dividend yield, so you get paid well to ride out the turbulence.
Canadian National Railway
CN (TSX:CNR) trades near $154 at the time of writing, down about 12% over the past six months. The railway is facing a possible strike and lockout as early as August 22 if it doesn’t reach a new collective agreement with the union representing rail workers. An extended shutdown of CN would potentially have severe consequences for the Canadian and U.S. economies due to the railway’s role in moving commodities and finished goods from coast to coast in Canada and down to the Gulf Coast of the United States.
At the time of writing, the Federal Government is refusing to intervene. In these situations, a deal often gets done at the last minute to avoid a shutdown, but that didn’t happen with CN this summer, and a surprise strike at the airline resulted in travel chaos for thousands of travellers on a major travel weekend. A prolonged rail shutdown would have a much larger impact on the country, so it is unlikely any strike action will occur or, at the very least, last for any meaningful time. The government can’t afford to let that happen.
Investors might want to start nibbling on CN stock at this level and look to add to the position on any additional downside. A quick peek at the CNR chart over the past 20 years suggests that buying dips can prove to be a savvy long-term move.
The bottom line on contrarian stocks
TD and CNR are good examples of high-quality Canadian companies that currently trade at discounted prices. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
