1 Battered and Shorted TSX Bank Stock to Smoothen the Market’s Bumps

TD Bank (TSX:TD) stock is oversold and could help your portfolio sustain gains in the second half of the year.

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It’s been a wild ride for the TSX Index over the past year and a quarter. Don’t expect volatility to back down anytime soon, as we enter a recession, and investors find new (or old) reasons to hit that panic button again. Smart long-term investors know that they have to put the panic button away. It’s too easy to press it when times get tough.

Indeed, the past year or so has been grueling on our wallets. Inflation, stock market losses, and higher rates on loans have been quite painful. In due time, such pressures will fade. We don’t know when they will fade, but if you’re looking to build wealth over the decades, you don’t need to get the timing right. All you need is to focus on discovering cheap companies that the rest of the market may be sleeping on.

It’s the micro, not the macro, that’s more relevant to self-guided investors who seek to do well over time!

In this piece, we’ll look at two stocks that I think could help investors smooth over the market’s coming bumps.

TD Bank: A Big Canadian bank under too much pressure

TD Bank (TSX:TD) has been on the receiving end of extreme volatility in recent weeks, thanks to the regional banking woes down south. As the stock hits 52-week lows, with considerable negative momentum, TD doesn’t seem like a name that’d smoothen out the market’s bumps. If anything, banking fears, loan losses, and bond losses may cause TD stock to add, not subtract, volatility from your portfolio.

Still, I think a lot of the negatives are baked in, here.

Yes, TD is a heavily shorted bank right now, with around US$3.7 billion being put up against it by short-sellers. TD’s American exposure, its up-in-the-air First Horizons deal, and other risks (Canadian housing) seem like the perfect storm for Canada’s second-largest bank.

These are prominent sore spots, but the stock is already down 25% from its high. Further, we’re dealing with a tier-one bank here, not a regional bank with a troubled history. As such, shorting TD stock seems unwise at this juncture.

It’s time for TD to walk away from First Horizons: I think it will, as investor calls grow louder

With calls for TD to walk or renegotiate terms for its First Horizons deal, I think the TD shorts could be in for a bit of a squeeze.

Though TD would get dinged (quite harshly, I might add) from walking away from First Horizons, I think it’s the smart thing to do. First Horizons has its own share of baggage. And with some of the best risk managers in the game, I don’t see scenarios where the deal still happens with the original terms.

Sure, the U.S. banking scene is a place where TD can beef up its growth. But a new slate of risks has opened up in recent months. Perhaps management couldn’t see what was in their blind spot, as they looked to make a deal south of the border. In any case, it’s not too late to minimize any damages from what I view as a minor fumble.

TD is lucky to have not closed the First Horizons deal, in my opinion. Ultimately, I think TD will end up walking away, as I’ve noted in prior pieces. There are many ways TD can make up for any quarterly financial hits as a result of a terminated deal. As someone wise once put it, you don’t need to make back the money where you lost it.

For now, TD is oversold and overdue for a squeeze. At such a low 9.84 times trailing price-to-earnings multiple, TD may have had the band-aid ripped off already. Shorts, beware.

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 Joey Frenette has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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