For most people getting a bargain feels good. Just look at the success of £1 shops and no-frills supermarkets, which offer their customers the chance to seemingly obtain a better deal than they would elsewhere.
Of course, the same pattern of behaviour is not quite so evident with shares. Some investors seem to want to buy more of a stock that has become more expensive. Others focus on the ‘bargain basement’ of companies, searching high and low for the cheapest share prices that could be about to soar.
One such company is HSBC (LSE: HSBA). Its status as a ‘bargain basement’ stock is perhaps not the most desirable, but, for long term investors, it seems to be worthy of purchase. That’s because, while the bank is not without risk, the market appears to be focusing too much on potential downsides rather than possible upside.
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For example, HSBC’s exposure to the Asian economy is a cause for concern in the short run, since the rate of economic growth in the region may be slowing down. However, in the long run the region holds stunning growth potential as the growing middle class begin to spend more and, crucially, are likely to use credit to do so to a greater extent than at the present time.
This means that a bank such as HSBC is well-placed to benefit from an economic tailwind and, even in the shorter term, its earnings performance is expected to be impressive despite the soft landing of China. In fact, its bottom line is expected to rise by as much as 17% in the current year, which makes its current price to earnings (P/E) ratio of 9.4 seem exceptionally appealing.
Similarly, house builder Barratt (LSE: BDEV) also has a very cheap share price. It currently has a P/E ratio of 12.2 and, while there are concerns surrounding the housing market’s price level, these are unlikely to hurt the company’s strong growth potential over the medium to long term.
That’s because the UK has a fundamental supply/demand imbalance when it comes to housing. Even if the required number of houses were built per year, it would take a very long time to make up for relatively low levels of house building in previous years. As such, demand for Barratt’s product (ie, houses) is due to remain strong in 2016 and beyond. And, with the company’s earnings due to rise at a double-digit rate next year, investor sentiment seems likely to improve in the months and years ahead.
Meanwhile, investment company 3i (LSE: III) may have posted a rise in its share price of 20% in the last year, but it still retains its status as a ‘bargain stock’. That’s because it has a rating of just 7.9, which makes it one of the cheapest stocks on the entire index. And, while its earnings are due to fall by 5% next year, 3i’s business is a rather volatile one in terms of its profitability. Therefore, while a fall in earnings is never welcome, 3i has the potential to bounce back strongly in future years.
In addition, 3i has the scope to rapidly increase dividends despite its bottom line being due to come under pressure. For example, it has a payout ratio of only 27%, which signals that shareholder payouts could more northwards in the long run.
