Beating a benchmark isn’t the easiest thing to do. Studies show that only 5% of all mutual funds and actively managed exchange-traded funds (ETFs) beat the S&P 500 over their lifespans. The percentages are a little higher for small-cap and bond indexes, but nevertheless, the data from the S&P show that it’s quite hard to beat the U.S. markets as a whole.
In Canada, it’s a little easier. The TSX has returned about 2% less per year than the U.S. markets have. This makes it an easier benchmark to beat. In this article, I will explore one TSX stock that has a decent shot at outperforming the TSX index over the next 12 months. Though I stop short of saying it will outperform over 20 years, it does look pretty good for the year ahead.
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TD Bank
Toronto-Dominion Bank (TSX:TD) is a Canadian bank stock with large U.S. operations. Out of favour for the last year because of a money-laundering investigation by the U.S. Department of Justice (DoJ), it has a chance to shine in the Trump administration.
Joe Biden’s advisors are/were known to be sticklers for banking regulations. During his term, Biden denied many bank merger and acquisition deals and also encouraged the Department of Justice to investigate banks. TD was a casualty of this during the Biden years. The bank was found laundering money for cartels and subsequently investigated and charged by the DoJ. In the end, it accepted a $3 billion fine and a $430 billion asset cap.
That was then, this is now. Donald Trump is set to take office on January 20 and is known to be much more lenient on bank regulations than Biden was. This doesn’t necessarily mean that TD can get its fine and asset cap reversed, but it does make future actions by the U.S. government less likely than they’d have been under a Biden admin. So, TD benefits from Trump’s election victory.
Valuation
If we assume that TD can avoid fines and asset caps going forward, then it is quite modestly valued. At a time when large bank stocks are reaching 13, 14, or even 15 times earnings, TD still trades at just 10 times adjusted earnings — adjusted means that earnings with the impact of the fine and other non-recurring factors taken out. If TD can just flatline its revenue and operating expenses in the year ahead, then it’s one of the cheapest large North American banks today.
Foolish takeaway
It’s been a challenging few years. Between a scuttled M&A deal with First Horizon, a DoJ investigation, and the ouster of its chief executive officer, TD has had its share of problems. Now, though, it may be beginning to see the light at the end of the tunnel. In the Trump administration, TD will likely face fewer regulatory issues than it did in the Biden years. As a result, its revenues and earnings have a good chance of growing. None of these facts mean that TD is risk-free or sure to go up or anything like that. But it has a fighting chance.
