Value stocks are companies that are trading at a discount to their intrinsic or book value. This can be subjective as it’s based on our own understandings of a company’s fundamental data and growth prospects.
Warren Buffett is among the most famous value investors globally. And as his example shows, investors can’t expect value stocks to reach their intrinsic value overnight. It’s normally a long game.
Of course, within the current market there are a host of companies that appear to be trading below their intrinsic or book value. So, in this article I’m focusing on a single sector, financials.
Barclays
I’m starting with the most simple of value picks, Barclays (LSE:BARC). The bank trades at 4.7 times earnings, making it one of the cheapest such stocks on the FTSE 100. In fact, I believe it’s the cheapest UK-based bank with the exception Secure Trust Bank which trades at 4.19 times earnings.
More illuminating is Barclays’ price-to-book ratio of 0.42 times. This is far below any of its peers, which predictably trade closer to 1 times. The ratio suggests that Barclays trades at a 58% discount to its net asset value.
Investors are certainly cautious on UK banks as higher interest rates could trigger a slew of defaults. However, despite some pretty nasty worst-case forecasts, all UK banks recently passed their stress tests. The risks appear more than priced into the Barclays share price.
Hargreaves Lansdown
Hargreaves Lansdown (LSE:HL.) is currently trading at 12 times forward earnings. That’s around the FTSE 100 average but some distance below its own five-year average. Between June 2018 to 2022, the average P/E was 29.4 times.
While investor activity has been falling amid a cost-of-living crisis and low investor sentiment, the group is benefiting from higher interest rates. Hargreaves lends its customers’ cash deposits out to the market, thus working on leverage.
Keep an eye out for the Hargreaves full-year results in September. I have a feeling that the interest rate tailwind has been under-appreciated.
Certainly, investors will be concerned about increased competition. Hargreaves currently has around 42% of the market. However, I believe the Bristol-based company’s user-friendly platform puts it some distance ahead of the rest, despite its fees.
Jackson Financial
Going stateside, Jackson Financial (NYSE:JXN) isn’t so well-known among UK investors. The stock has rallied nearly 20% over the past month (up 24% over 12 months), but still sits below where it was before the Silicon Valley Bank fiasco.
It currently trades at a 70% discount to the sector on a forward earnings basis, and a 60% discount to the sector on a forward price-to-book ratio. Currently trading around $37 a share, the firm offers a 6.5% dividend yield, representing a sizeable premium compared to its peers.
However, it’s worth noting that Jackson Financial is exposed to similar headwinds, notably concerns around defaults. That said, these concerns appear less pronounced in the US.
