George LougheryToronto-Dominion BankTD.TOBUYMar 15, 2005

She's been wrong about the Canadian banks the past year, that they're expensive. They were up 30% last year + 20% this year. These stocks are priced for perfection and trading well above historical averages in PE. Wait. Last year, they released provisions for loan losses into earnings, which was a temporary boost. Their only growth aspect this year is how many branches a bank can close, which is a weak growth driver. She hasn't bought any banks this year.

Strong name. Second-largest of the Big 5, with one of the largest US retail franchises among those 5. Redeemed from money-laundering scandal, and Q1 had record earnings. Stock's now run past consensus target. Not a bad idea to trim, wait for a better point to re-enter.

RY is her play in the sector.

Mortgage renewals are happening, but not a huge increase in defaults. Canada's being resource-dominant helps bank earnings, and this attracts foreign investors. Cloud of money laundering behind it. Could move higher if commodity trend continues.

That said, the move has been huge. Don't be surprised if stock stays flat a bit after next report, until next uptrend in earnings.

It has recovered from the money laundering scandal and owns the 6th largest bank in the US which has grown from nothing 15 years ago. The restrictions in the US are not all that difficult. He thinks US banks will continue to do well and dividends in Canadian banks will keep rising.. TD is still cheaper than other banks.

Compliance issues persist in US -- can't open new branches, can't make acquisitions until the Fed gives it the green light. Big runup due to banking sector tailwinds. Unless we really get higher inflation and interest rates rising, he imagines banks in Canada will continue to grow, though not at the pace of last year. 

Avoids the Canadian banks now, because valuations are too high vs. historical norms. Also, the credit cycle hasn't run its course, which is a risk and could impact earnings.

If you've held for years, no reason to sell today. He's not a buyer here, mostly fully priced. Fears of US growth are largely behind them. Real questions involve Canadian consumer and whether housing market comes back to life (engine of growth and profitability).

Canadian banks have run up so much it is time to trim and re-position portfolio sizes. Its assets in the US have been capped but TD has optimized their assets there. Ideally he would like the cap on US assets taken off so they can build up their retail operations there. It is lagging its peers in commercial banking in Canada.

Don't buy now. Not buying any of the Canadian banks -- problem is valuation. Trading 14x forward PE, 2.2x book value, 3.5% yield. He just can't pay these sorts of valuations. 

Other areas of the market are more beaten up, so look there.

It's complicated. Canadian bank stocks are pretty rich compared to US, trading at higher multiples to book value. Yes, paid the financial penalty, but still paying in terms of ability to grow in the US (and those problems will persist a while).

Remember how WFC was in purgatory for a long time, and this is a Canadian bank. Could be caught up in CUSMA negotiations. If you need a Canadian bank, look at BNS or RY.

Outlook is favourable. He owns BMO, RY, and TD. All 3 had good earnings, with TD probably the best. But the other two were also strong.

Tight, well-regulated oligopoly. A need, not a want. Diversified by geography and line of business. Good line of sight through the cycle to high, single-digit rate of dividend growth. He's overweight the banks.

Concern on this name was asset cap in the US. Last quarter it was 10% under the cap, leaving some really good room for growth in the US. Models 10% growth. Trading at a pricier PE than peers, but reasonable.

He wouldn't buy before earnings. Let the stock breathe a bit.

Shows what sentiment can do to a stock. Multiple expansion has really driven the total return. Right now, multiple's too rich for new clients. He has trimmed, just to maintain the proper weight in portfolios. Constructive longer term on earnings growth, though won't be as strong as we've just seen. 

Demonstrates how focusing on both earnings growth and the multiple can lead to a really robust return.

Still owns as a core position, took partial profits. At the time of the pick, it was (relatively speaking) a bit of a dark horse due to the money laundering penalties. Investors like its plans for growing both earnings and dividends.

Kudos to management. Financials did very well last year, and TD recovered along with them. Trading at high end of valuation range. Canadian economy did better than expected, defaults on personal mortgages not as bad. Interest rates have come down, US economy doing fine. 

He doesn't like owning companies with "handcuffs" on them, such as no growth in the US. But he's bullish on the Canadian economy, so you have to own financials.