Very frequently, pessimistic markets are the best markets to invest in. With pessimism comes low prices, and you know what they say: “Buy low and sell high.” Now, when markets take a dip, investors get scared and backward rationalize their fear by coming up with reasons why, this time, stocks will go down and stay down. It doesn’t usually work out the way they predict. When it comes to broad markets, lower prices are better prices to buy at.
It’s a little trickier with individual stocks. Such stocks face specific risks — sometimes so much such risk that they go bankrupt and become worthless. It takes more research to invest profitably in them, but occasionally opportunities do emerge. In this article, I will explore one stock that I’m buying hand over fist in August despite the market’s pessimism about it.
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TD Bank
Toronto-Dominion Bank (TSX:TD) is a Canadian bank stock that has underperformed the other Canadian bank stocks over the last five years. The reason for its underperformance is a major money-laundering scandal. Last year, the bank had a $13.4 billion merger and acquisition deal cancelled because of what the U.S. Government called “anti-money-laundering issues.” The stock sold off a bit on that news.
The selling really got heavy when it came out what the money-laundering issues were really about. TD Bank tellers in New Jersey were caught laundering money for a Fentanyl cartel. Later, employees in New York and Florida were caught doing similar things. When it came out that the U.S. investigation was not just about money laundering but laundering money from selling a deadly and widely publicized street drug, TD went all the way down to $74. The feeling at the time was that U.S. regulators would never allow TD to grow in that country again and might levy fines far greater than the $2 billion that analysts projected.
Why I bought
I bought TD when it dipped to $74 because I figured that that level would not last long. Specifically, I did not think that the fines would go beyond $2 billion and that the stock was cheap, considering its long-term earnings trajectory less a $2 billion hit. There is a chance that the fines spiral out of control, of course. This makes the stock unsuitable for the most risk-averse investors. Personally, I’m prepared to bet on the scenario I see as most likely.
Strong revenue growth
If TD’s money-laundering fines do not go beyond $2 billion, then the stock is worth more than it trades for today. It is the cheapest North American mega-bank, going by the price-to-earnings ratio (approximately 10), and had a 12% revenue growth rate in the trailing 12-month period. By contrast, Bank of America, which didn’t grow at all last quarter, trades at 14 times earnings.
Foolish takeaway
Taking everything into account, I’m comfortable holding my TD Bank shares. The company’s cheap, it’s growing on the top line, and while fines are holding back bottom-line growth, the effect is not massive. Of course, the stock isn’t for everyone. News about the money-laundering issues could cause jitters, and there’s a small chance of the fines reaching “worst-case scenario” numbers. The most risk-averse investors probably aren’t well served by what TD has to offer. For me, it’s an intriguing opportunity.
