If you’re the kind of investor who likes to really understand the businesses in which you own shares, you may find banks rather problematic.
Take HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US), for example. It’s a global group of banks operating in many different countries, with total assets of $2.7tn, and liabilities of $2.5tn.
HSBC’s 2013 annual report had 600 pages, and there were similar documents for each of its subsidiaries. There’s simply no way you or I could effectively analyse such a large and complex business.
However, investment doesn’t always have to be complex — and I rate HSBC as a strong buy, thanks to three simple metrics, which are all at rare and compelling values.
1. Cheap earnings
HSBC currently trades on a 2014 forecast P/E of just 10.8 times.
That’s cheap by any standards, but reassuringly, this forecast doesn’t rely on a massive hike in profits compared to last year: HSBC currently trades on a trailing P/E of 12, which implies earnings growth of around 12% this year.
2. High, but not too high
High yields always attract investors, but if they get too high, it signifies an underlying risk.
HSBC’s prospective yield is currently 5.3%, which I reckon is high enough to be very attractive, without being high enough to raise any red flags.
An added reassurance is that HSBC’s dividend was covered 1.7 times by earnings last year, and cover is expected to be the same this year.
3. Can’t beat the book
HSBC’s current share price of around 590p is only slightly above its book value, which is approximately 570p.
This provides an attractive level of downside protection at the current share price — unless HSBC experiences a sharp rise in bad debt or another serious credit quality problem, the bank’s shares are unlikely to trade below their book value.
If that’s not enough…
If you’re still unconvinced, then consider this. Perhaps the UK’s most successful fund manager of all time, Neil Woodford, sold out of banks in 2003, when he spotted the warning signs that would lead to the financial crisis.
Last year, after ten years away from the banking sector, Mr Woodford started buying shares in one UK bank — HSBC.
Explaining his choice, Mr Woodford told the Financial Times that HSBC ” is well-managed, it has learnt from its mistakes, and it’s cheap”.
HSBC has got even cheaper since Mr Woodford started buying, and in my opinion it’s an excellent time to buy the stock for long-term income, which can be reinvested to generate compound growth.
