History Doesn't Repeat, But It Does Rhyme... Starring TD Bank

When I mention I’ve been buying TD Bank (TSX:TD) shares lately, I get what’s become a pretty predictable reaction.

It goes something like this:

“Don’t you realize there’s a MASSIVE FINE coming from the bank’s involvement in money laundering???? Plus they’ll be blacklisted by the regulators, customers will abandon them, and branches will start randomly exploding!!!!”

I’m exaggerating, but only a little bit. The doomer narrative surrounding TD really is that extreme.

Look, I’m the first to admit TD did some bad things and it has some significant problems. There’s zero chance it walks away from this whole situation scot-free. It is staring a US$1B+ fine square in the face.

(If y’all aren’t up to date on the scandal, the Globe and Mail had an excellent story about it yesterday. And for those of you who don’t have a Globe subscription, here’s a Bloomberg story that summarizes what went wrong.)

There’s also been real damage done to the bank’s reputation, especially in the United States. TD has been an aggressive expander south of the border in the last 15 years, and this scandal already impacted its ability to buy a U.S. regional bank. Remember, TD tried to buy First Horizon in 2023, a US$13.4B deal that was kiboshed by U.S. regulators after they put the bank under investigation for money laundering. There’s the chance the company will be in the dog house for years after this.

Ultimately, this all comes down to uncertainty. Investors hate it when a company has a murky future, and so they invent all sorts of outlandish scenarios, each more outrageous than the last. The most likely outcome is mundane, but that doesn’t stop our imaginations from going wild.

Rather than spending a bunch of words trying to speculate on some future that’s hard to predict, let me instead go backwards and tell the story of how I made TD the first ever stock I purchased amid a storm of controversy that sure looks a lot similar to today.

TD in 2002

The year was 2002, and I was itching to get into the stock market.

I didn’t know much about anything, but I was rapidly learning. I would get home from my overnight job at the local grocery store, get something to eat, and immediately flip on Report on Business TV, which later became BNN.

The best show was Market Call, which I made sure to watch whenever I could. It featured real fund managers taking questions from individual investors. Certain managers made a lot of sense to me, so I’d pay extra attention to their picks.

This was all right in the middle of the 2001-03 bear market, although I don’t really remember the market being that bad. Sure, tech was still melting down, but the kinds of value stocks I was interested in held up much better. Besides, it was kind of a slow grind lower. We didn’t really see many crashes or hugely down days.

Still, it was not a great time for the markets, and then 9/11 hit. This naturally spooked the markets a little more, and it gutted the travel industry for at least a couple of years after. This, combined with continued pressure from anything related to technology, weighed on the markets for years.

But wait. There’s more. There was a series of notable companies that also went bankrupt around the same time. We all remember Enron, of course, but there were other prominent bankruptcies at the same time — including Conseco, Worldcom, and Adelphia Communications.

There were also some prominent bankruptcies in Canada, during that time, including Air Canada in 2004. Nortel wasn’t technically bankrupt until 2009 but in the early 2000s it had already lost some 90% of its peak value.

Despite all this, your author was naively looking for stock bargains.

This was around the same time that I missed out on a life-changing gain when I didn’t buy depressed McDonald’s shares.

This is still easily one of the five biggest investing mistakes I’ve ever made.

Even back then, Canadian banks had a well-earned reputation for steadily compounding investors’ wealth over decades, all while paying generous dividends. These banks had a history of chugging along no matter what was thrown at them, continuing to prosper while navigating things like two world wars, the commodity crisis of the 1970s, high interest rates in the 1980s, and a nasty recession in the 1990s.

In the early 2000s these banks were facing another set of issues. They had lent money to various businesses that were suddenly struggling. TD was in particularly rough shape as it made more than $1B in commercial loans to what turned out to be risky borrowers, including telecoms and utilities (namely, Enron). Many of these loans were written off in 2002, causing TD to post negative earnings for the first time in a very long time.

To the company’s credit, it was frank when discussing results with shareholders. From the 2002 annual report:

And through all this there I was, making my first ever investment. My thesis was simple: TD had been through a lot and made some mistakes, and it would eventually recover. The company had a new CEO (Ed Clark) that vowed to fix the old regime’s mistakes, it had a solid retail banking business, and these were one-time items. Profitability would bounce back in 1-2 years and these problems would be firmly in the rearview mirror.

That’s exactly what happened, although I didn’t get to see the benefit from holding over the long-term. I bought in the latter parts of 2002 and sold sometime in 2004 for what I believe was about a 50% gain. That money was then invested in some other nameless stock that probably wasn’t a good buy. I had yet to learn how powerful it is to buy a great company and hold it forever.

I recently wrote about TD Bank over at Seeking Alpha. You can check out that article here.

TD today

To recap, TD in 2002 offered:

• A great bank at a very reasonable valuation

• Weighed down by a temporary one-time event

• An event that was a VERY BIG DEAL at the time, but barely mattered a decade later

• Excellent potential long-term returns because I bought at maximum pessimism

Compare that to today. TD is once again a great bank that’s trading at a very reasonable valuation (at approximately 10× 2025’s earnings estimates). It continues to have an excellent Canadian banking business (either the second or third-best in Canada, trailing Royal Bank and neck and neck compared to National Bank, at least in this analyst’s opinion). The U.S. operations are good, too.

And with the potential money laundering penalties a major question mark, I’d argue we’re pretty damn close to maximum pessimism.

This isn’t exactly like 2002, but they’re pretty similar situations.

I’ve been following the Canadian markets for 20+ years, keeping a close eye on the TSX for at least 10. My experience helps me here, and I can say from experience that the best time to buy the Canadian banks is when they’re in the middle of such crises.

In fact, I built an entire bank portfolio doing just that. I first bought Royal Bank in 2018 after the stock dropped almost 20% in just a couple months. National Bank was purchased in size during the 2020 meltdown. I picked up CIBC shares in 2022. And, most recently, I’ve been buying TD.

The strategy is simple. I buy the bank that has underperformed the rest over the short-term. Or, if they’re all down by about the same amount, then I buy the highest quality bank of the group.

TD has significantly underperformed its peers over the last year, so that’s where I’m looking.

(Also, who would’ve predicted CIBC leading the pack over the last year? Not I, that’s for sure. This is exactly why I own all six large Canadian banks…)

The bottom line

I already know I’ll get feedback saying this analysis is too simplistic, that I’m not properly articulating the 14% chance TD gets a $3B fine or some other similarly precise piece of odds.

Go ahead and debate the tiny details. But I’ll kindly sit this one out.

I’d rather get the big picture right. I can’t see the future, but I can look backwards and see just how much this reminds me of 2002. I remember the situation vividly because it was the very first time I ever stuck my neck out and made a decision solely on my own analysis.

I’ve also amassed a lot of experience since then, and these situations almost always end up being buying opportunities. Not always, of course, but the winners have a big edge on the losers.

Which group will TD join? I’m leaning towards the winners and have my portfolio positioned accordingly.

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