TD is a top stock to buy now, but only if you believe in this one thing

There are stocks where the entire investment thesis rests on one key factor. Often, things like patents and trademarks single-handedly hold back a company’s entire margin. If they are lost, the company that owns them becomes nearly worthless. In this article, I will examine a stock that is intriguing right now, provided that one specific scenario is avoided. If that scenario does not occur, the stock is dirt cheap; otherwise, it is a confirmed value trap.

TD bank

Toronto-Dominion Bank (TSX:TD) is a Canadian banking stock with a lot going for it. It has a cheap valuation (around 10 times adjusted earnings), several high-growth segments, and a high dividend yield. However, it is also embroiled in a major money laundering scandal. It may ultimately prove to be a bargain at current prices, but only if a “worst-case scenario” is examined does not do play out.

Details about the research

TD Bank is under investigation by the U.S. Department of Justice (“DoJ”) for laundering money for drug cartels. More specifically, it is being investigated for laundering money for Chinese fentanyl cartels in the eastern United States. Several bank employees were caught in such practices in New Jersey in 2022 — this was a factor in TD’s cancellation First Horizon buyout deal. Similar violations were later found in New York and Florida.

TD admitted to the mistakes made by its affiliates when they first came to light. It has since made a provision of US$3.06 billion for money laundering fines it expects to incur. If the fines stop at US$3.06 billion, TD stock is cheap. The worst-case scenario here is one where the fines don’t stop this year, but spiral out of control, eventually reaching tens of billions of dollars over several years. Such things have happened to banks in the past. For example, Bank of America was fined $30 billion in connection with the SMC scandal over a period of about a decade. If something like that happens to TD, the stock will ultimately prove to be no bargain at current prices.

A cheap valuation

There is one thing that TD has indisputably in its favor: a cheap valuation.

At current prices, TD is trading at

• 10 times adjusted earnings;
• 2.7 times turnover; and
• 1.35 times book value.

These multiples are low, even by the standards of banks, which are generally cheap. As long as TD can avoid the money laundering fines spiraling out of control, it’s a steal. I bought the stock myself because I think the investigation will be over by the end of the year. There are real risks here, though. Nervous investors should stay away.

Stupid takeaway

TD Bank stock is a classic example of the complexity of analyzing stocks. It has all sorts of upsides, but last quarter every penny of potential upside was wiped out by the penalty clause. It’s a tough one for sure. I’ve invested in it, but I wouldn’t recommend it to investors with a low risk appetite.