The TSX Index bull market is coming in hot. And while it feels like a good idea to book profits before September, a month that’s historically seen more than its fair share of volatility, I do think that doing so is still timing the market. Indeed, seasonal pressures may or may not hit this time around. With August experiencing somewhat rougher waters underneath the surface, perhaps those seeking to get out before September may be causing a more volatile period to hit a bit earlier than expected. Indeed, I’m not a big advocate of trading based on the month that’s ahead.
Whether that’s the September choppy season as traders and investors return from their summer vacations to make moves ahead of the fourth and final quarter of the year, or trying to play a so-called Santa Claus rally in December (Santa doesn’t always come to town!), I think it’s best to buy stocks you’d be willing to hold for the next 10 years or more whenever there’s a reasonable price of admission and fundamentals that some near-term thinkers might be at risk of discounting, especially as more exciting things, especially in the technology sector, fall onto their radars.
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TD Bank
In this piece, we’ll look at one quality name in TD Bank (TSX:TD) that’s starting to really come in after a spectacular past two years of performance. Of course, just about every Big Six Canadian bank has fallen under considerable pressure in these past few weeks. But shares of TD Bank have been hit just a bit harder, now down a hair below 8%.
As TD stock flirts with a correction, I do think that those who’ve been waiting for an entry point might finally get it. Corrections are only natural, even for an industry like banking that’s been so red-hot with all the tailwinds still very much in play this summer. Of course, a bit of profit-taking ahead of earnings that have high expectations isn’t a bad idea.
And given valuations have swelled to levels not seen in a very long time, I did warn investors about chasing any one of the big banks going into their late-summer quarterly earnings reports. Indeed, “playing” earnings can be incredibly risky, especially with some of the hottest large-cap names on the TSX Index looking unstoppable, with valuations that are not at all typical for a cohort that’s traded at a discount to the rest of the market.
It’s still a bit frothy, even as a correction nears
So, is TD Bank stock, or any other bank, worth consideration now that the multiple is lower, with a dividend that’s slightly higher but still historically compressed (2.8% right now)? In my view, the banks have done nothing wrong to cause such an industry-wide spill.
Simply, the names got a bit too expensive, and a correction seemed only natural, especially after the relatively smooth ride up. Of course, the U.S. regulatory overhang remains there, and that might call for a bigger discount to the Big Six. At 18.9 times trailing price-to-earnings (P/E), shares are still a little bit frothy for my liking.
But then again, if you want more solid growth prospects, that’s the going price. At the end of the day, there are real fundamental drivers behind the name. With shares effectively trading as though a big miss was reported, I do think it could make sense to buy after the bank earnings season, especially if it’s going to take more than a fantastic result to impress investors. In short, TD might be a nibble while it’s off 8%, but a more substantial buy if shares wind up nearing a bear market.
