If I’d put £1,000 in Hargreaves Lansdown shares 1 year ago, here’s what I’d have now!

Dr James Fox explains why he believes Hargreaves Lansdown shares are undervalued, despite concerns about slow growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man pulling an aggrieved face while looking at a screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If I’d invested £1,000 in Hargreaves Lansdown (LSE:HL.) a year ago, I’d now have £830 plus £45 in dividends — a disappointing return.

Despite sporadic upward movements, the stock is down 17% due to a challenging environment for private investors, marked by a cost-of-living crisis and heightened stock market volatility.

Moreover, Hargreaves — the UK’s top investment platform — has faced difficulties sustaining its pandemic-era growth amid the post-Covid economic reopening.

Problems arising

Hargreaves remains the UK’s largest brokerage by a country mile. It has an intuitive platform and excellent customer support — as a customer I can vouch for the latter.

However, its peers, including AJ Bell, are growing faster in terms of client volume. One of the fundamental reasons for this is Hargreaves’ fee structure. It’s more expensive than its peers with every trade costing between £5.95 and £11.95 depending on frequency.

That’s fine if I’m investing large amounts. But if I was looking to build a portfolio of smaller holdings or practice pound-cost-averaging (that is, drip-feeding my investments so the price averages out over time), this ‘premium pricing’ could be off-putting. Given the current climate, Hargreaves may need to make its pricing more appealing to avoid a slower pace of growth.

Of course, there are multiple ways of measuring growth. One is net new customers — this is where Hargreaves is floundering — while another is assets under administration.

In theory, investors with more money are more likely to be content with Hargreaves’s higher fees. And from a net interest margin perspective — brokerages lend out customers’ cash to the market — these high-wealth investors are much more valuable.

The below graph highlights that while the Bristol-based broker has lost some market share, it has a dominant position in the market.

Source: Hargreaves Lansdown

Worth the risk

Early indications also suggest that Hargreaves could drop out of the FTSE 100 on Wednesday (29 November) after FTSE Russell, which manages the FTSE indexes, announced that the firm could be replaced as its market value falls.

Nonetheless, Hargreaves has attractive near-term valuation metrics compared to its peers, trading at just 10.3 times 2023 earnings.

However, as alluded to above, the problem is growth. The below table shows that Hargreaves isn’t forecast to deliver another bumper year like 2023 through the medium term. As such, the forward price-to-earnings ratio is more expensive, but remains much cheaper than its peers. It still looks undervalued to me.

2023202420252026
EPS (p)68.360.458.863
P/E10.311.712.111.2

Long story short, I still have faith in Hargreaves to continue growing. But I think it needs to make some changes. This could mean making its fees proportionate to the size of the trades, or having a monthly membership for fee-free dealing.

It’s also worth considering the case of Charles Schwab. It’s the biggest brokerage in the US and it makes all its income from net interest margins.

If Hargreaves were to do the same, it would lose fee income, but it could take an even more commanding position in the market, potentially leading to it having significantly more assets under administration.

I’d buy more of this stock, if I had the capital, despite slowing growth. It remains in pole position to dominate the sector, I feel.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in Hargreaves Lansdown Plc. The Motley Fool UK has recommended Aj Bell Plc and Hargreaves Lansdown Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »