I’d like to introduce another new series (I just added Book Reviews) to the blog, Portfolio Updates. As I buy and sell stocks in my own portfolio I’ll share my reasons for doing so along with some analysis to back things up. This is great for you the reader to gain some knowledge on criteria to look at when buying or selling securities and it also forces me to think through each trade in more detail!
As the title states I plan to buy shares of TD bank, let’s go over the details.
Time horizon: Very Long (retirement)
Account type: LIRA (Locked In Retirement Account)
First of all, many of you will not be familiar with this account type, just like I wasn’t when I had to fill out a mountain of paper work to get everything setup!! You may be wondering, Shouldn’t investing for retirement be done in an RRSP? In most cases yes, but my situation is a bit different.
When I left my previous job to go travel (you only live once!) I had a vested pension which needed to be moved. I opted to manage the funds myself via a Locked In Retirement Account (LIRA). It is similar to an RRSP except it is for pension funds and has additional restrictions. Why manage the funds myself? Well, the pension plan targeted an annual return of 2.5% per year, I think I can do better. Granted, I am taking additional risk.
- Medium – Stocks
- I am comfortable with putting my pension funds into the stock market instead of lower risk investments such as bonds or GICs
- Given that I want to minimize risk I want to invest in a stable industry which is strong in Canada, banking meets this criteria
- Companies that pay dividends also tend to be more stable, all Canadian banks pay dividends
- I have had good success with TD in my regular investment account
Peer Group Analysis
In the table below I have chosen to compare 3 pieces of data, Price/Earnings ratio, Dividend Yield and 10 year performance for the 5 biggest Canadian banks.
|PE||Yield||10 Year Return|
*Note that these returns are capital gains only and do not include dividends
The data above shows that while TD is the most expensive in it’s peer group with a PE of 12, it has returned 152% (not including dividends) over 10 years which is exceptional. Expectations are high for TD but the bank is meeting those expectations. It’s yield is the lowest at 3.64% but this is fine with me because I am not investing to generate an income. If I was investing for income I would consider BMO as it has a higher yield and would be a value play with a PE of 10.69.
Here is a chart illustrating the 10 year returns for the above banks.
*Note that TD out performed peers on the 5 and 1 year charts as well.
Stock Purchase Timing
Timing the market perfectly is difficult if not impossible but you can certainly improve your chances with technical analysis. How does the stock look right now? Let’s find out.
While the above chart might look like a bunch of spaghetti, it tells us some interesting information. I won’t get into the details of technical analysis, that will be for future posts.
Indicators & Technical Analysis
Both RSI (Relative, Strength Index, the topmost graph) and Stochastics (the bottom most graph) tell us that the stock is neither overbought or oversold. These indicators tell us when a stock price reversal might occur for example when a stock has gone up significantly and is poised for a drop. These indicators are neutral.
The moving averages are located on the main chart and are represented by blue(50 day) and red (200 day) lines. The 200 day average is upward sloping which is good. The 50 day average has stabilized after a big drop and is holding over the 200 day average. This is another good sign, the drop correlates to the drop in the stock price over the last few months with all the uncertainty in the market over Europe.These indicators are positive.
The last indicator, MACD (Moving Average Convergence Divergence, the second chart from the bottom) is ever so slightly positive. The black line is just passing the signal line (red). If I was looking to minimize risk further, I could wait a couple days to see if this bullish signal is confirmed with a firmer rise above the signal line.
The last piece of information I will talk about are the two green lines I very deftly drew in with MS Paint! While I am not an expert at reading charts, it looks like the stock is forming higher lows. This is a positive sign as it is indicating that the stock is not dropping below the lowest low which was established at the beginning of June.
Taking into account that TD has been performing well over the long term, pays a good dividend, is below it’s 52 week high and technical analysis indicates that it is in mostly positive territory, I am going to buy the stock for my portfolio. As I indicated earlier, I would also consider buying BMO as a value play if TD under performs.
**This article is for educational purposes only. I am not a professional financial adviser or stock broker and am not responsible for any investment decisions you make.**
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