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Tuesday, February 27, 2024

PhilStockWorld Top Trade Alert – Nov 27 2023 – TD Bank (TD)

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PhilStockWorld Top Trade Alert – Nov 27 2023 – TD Bank (TD)

CAD Chart MonthlyTD Bank (TD) is cheap at $61.50 ahead of their earnings as well – especially when you consider that, for the past year, they have been lending out money at less than 75 CAD to the Dollar and, assuming Canada’s currency doesn’t completely collapse – the are likely to get paid back in stronger loonies in the Future and THAT will be a very nice bonus boost to profits down the road.  

I asked Shelbot to check my math and he has this to say: 

 🤓 To illustrate the potential impact of a stronger CAD on TD Bank’s earnings, we can use a hypothetical scenario where the CAD/USD rate increases from 1.36 to 1.30 by the end of 2023. Assuming that TD Bank’s US operations have the same level of profitability and growth as in the third quarter of 2023, and that the average exchange rate for the fourth quarter of 2023 is 1.33, we can estimate the following effects:

    • When the CAD is weak relative to the USD, TD Bank’s US earnings are worth more in CAD terms, and vice versa. This is called the translation effect1. The translation effect would be negative, meaning that TD Bank’s US net income would be worth less in CAD terms. Based on the third quarter net income of $1,590 million CAD, we can estimate that the fourth quarter net income would be $1,557 million CAD, using the average exchange rate of 1.33. This would be a decrease of $33 million CAD, or 2%, compared to the third quarter.
    • The revaluation effect would be positive, meaning that TD Bank’s US net asset position would increase in value in CAD terms. Based on the net asset position of $77,491 million CAD as of November 24, 2023, we can estimate that the net asset position as of December 31, 2023 would be $83,333 million CAD, using the spot exchange rate of 1.30. This would be an increase of $5,842 million CAD, or 8%, compared to November 24, 2023.
    • The net effect of these two effects would be positive, meaning that TD Bank’s earnings would increase in CAD terms. The increase in the net asset position would more than offset the decrease in the net income, resulting in a net gain of $5,809 million CAD, or 7%, compared to the third quarter.

Now, we’re not saying it’s going to happen that soon but, eventually, the Dollar will weaken and it’s a good hedge if we are playing the Fed to stay tight and they get loose instead – that will weaken the Dollar, strengthen CAD and TD is off to the races – see how easy it is? A nice play to make on TD for our Butterfly Portfolio is: 

    • Sell 5 TD 2026 $60 puts for $6 ($3,000) 
    • Buy 15 TD 2026 $60 calls for $8 ($12,000) 
    • Sell 10 TD 2026 $70 calls for4 $4 ($4,000) 
    • Sell 5 TD April $60 calls for $3.75 ($1,875) 

That’s net $3,125 on the $15,000 spread so we have $11,875 (380%) upside potential at $70 but notice we sold $1,875 in premium using our first 144 days out of the 781 we have to sell.  So, if TD is down or flat, we’ll have 4 more sales like that and make about $7,500, which would turn our spread into a net credit. If TD is up then we roll the short calls to higher strikes and we’ll have our $15,000 in 2 years.  Aren’t options fun?