Why Short-Sellers Are Wrong About Toronto-Dominion Bank

Ignore the short-sellers and boost your exposure to Toronto-Dominion Bank (TSX:TD)(NYSE:TD).

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canada’s banks continue to attract considerable negative attention, particularly from south of the border due to fears of a major housing correction emerging. This scenario sees Canada’s second-largest lender Toronto-Dominion Bank (TSX:TD)(NYSE:TD) as being the most shorted stock on the TSX. The lenders’ recent earnings miss has also attracted considerable attention from short-sellers.

While pundits have been claiming that a meltdown is due for quite some time, it has yet to occur — and likely will never occur. And this, combined with the strength of its business, means that the short-sellers are entirely wrong about Toronto-Dominion.

Now what?

Claims that Canada’s housing market is overheated and due for a massive correction have been circling for years. These claims triggered considerable short-selling of Canada’s major banks and alternate mortgage lenders including Bank of Nova Scotia and Home Capital Group Inc. (TSX:HCG). When Home Capital Group went into meltdown mode in mid-2017, many pundits, notably those from the U.S., claimed that it was the top of the iceberg and that Canada’s financial system would soon follow.

Nonetheless, Home Capital Group’s brush with the corporate undertake was solely the result of its own internal problems and not evidence of systemic failure among Canada’s lenders.

Fears of a housing meltdown and the impact it would have on the economy led to Canada’s prudential regulator, the Office of the Superintendent of Financial Institutions, or OSFI, move to gradually tighten mortgage regulations.

This, in conjunction with moves by British Columbia and other provinces as well as Ottawa to curb speculative investments in housing, has caused the frothy market of mid-2016 to cool. After peaking in May 2017, the growth of the national average house price slowed, rising by 5.7% year over year in December 2017, with much of that growth stemming from the overly heated housing markets of Vancouver and Toronto.

Even if housing prices are sharply corrected, the fallout for Canada’s major banks such as Toronto-Dominion would prove minimal. A larger number of mortgages are insured, and those that aren’t have conservative loan-to-value ratios. Toronto-Dominion’s fourth quarter 2017 came in at 42% and 50%, respectively. The bank’s credit quality also remains solid, as is evidenced by the net impaired loan ratio of 38 basis points at the end of the fourth quarter 2017, an eight-basis point improvement over a year earlier.

Toronto-Dominion is also well capitalized, having a common equity Tier 1 capital ratio of just under 11%, thereby underscoring the bank’s financial strength.

What many short-sellers are forgetting is that Toronto-Dominion will benefit from higher interest rates in the U.S. and Canada. These have already boosted the net-interest-margin, or NIM, for its Canadian retail business by eight basis points year over year to 2.86%, while its U.S. retail bank expanded to 3.18%, or five basis points higher than a year earlier.

Trump’s tax reforms will serve as a powerful tailwind for earnings, as the U.S. economy benefits from his planned fiscal stimulus.

These factors will give Toronto-Dominion’s earnings a healthy boost, particularly as the U.S. economic recovery gains greater steam, which, along with rising business as well as consumer confidence and employment, will give demand for credit a solid boost.

So what?

Regardless of what the short-sellers believe, a major housing correction is unlikely. When combined with the strength of Toronto-Dominion’s financial position, its high-quality loan portfolio and the increasingly positive economic outlook, this will ultimately be a costly trade for short-sellers.

In fact, there are signs that Toronto-Dominion is well positioned to benefit from greater economic growth in Canada and the U.S., which along with higher interest rates, will give earnings — and ultimately its stock — a healthy boost.

Should you invest $1,000 in Algonquin Power and Utilities right now?

Before you buy stock in Algonquin Power and Utilities, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Algonquin Power and Utilities wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Matt Smith has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Bank Stocks

dividends can compound over time
Bank Stocks

Here’s How Many Shares of CIBC Stock You Should Own to Get $2,000 in Yearly Dividends

This dividend stock is a prime option for investors, and it's from more than dividends.

Read more »

shopper buys items in bulk
Bank Stocks

How I’d Allocate $1,000 in Domestic Stocks in Today’s Market

Got $1000? Here's how I'd play the tariff war with Canadian domestic stocks this April! Royal Bank of Canada (RBC)…

Read more »

man touches brain to show a good idea
Bank Stocks

How to Approach Royal Bank Stock in 2025

Royal Bank is down more than 10% in 2025. Is the stock now oversold?

Read more »

Investor wonders if it's safe to buy stocks now
Bank Stocks

Where Will Royal Bank of Canada Be in 2 Years?

Down 12% from all-time highs, RBC stock trades at a sizeable discount to consensus price target estimates in April 2025.

Read more »

open vault at bank
Bank Stocks

3 Canadian Bank Stocks to Shield Against Market Downturns

Canadian bank stocks are some of the best options on the market, and these three are probably the top ones.

Read more »

calculate and analyze stock
Bank Stocks

1 Canadian Stock Down 7% to Buy and Hold for a Long Haul

Now is the time to take advantage of this top-notch Canadian stock, buying it while it's still down.

Read more »

A worker drinks out of a mug in an office.
Bank Stocks

Royal Bank of Canada: Buy, Sell, or Hold in 2025?

Royal Bank is down 6% in 2025. Is it time to buy the dip?

Read more »

chart reflected in eyeglass lenses
Stocks for Beginners

Seize the Dip: Investment Opportunities Await This April

If you're looking for one and only one opportunity during a market dip, buy this top stock.

Read more »