Why I'd buy this 'secret' turnaround stock over HSBC

After crashing to 417p, the lowest level printed this decade, shares in HSBC(LSE: HSBA) have put in a strong performance since the lows of mid-2016.

Indeed, at the time of writing, shares in the global banking giant are trading at around 750p, up approximately 80% from the lows.

Several factors have helped the bank's recovery. Weak sterling has helped improved earnings per share, as an improving global economy, cash returns to investors, and rising interest rates have all helped improve sentiment towards the global banking sector.

Further growth ahead

With several tailwinds working for HSBC, City analysts expect the bank's earnings per share to return to growth this year, breaking a multi-year trend of falling income.

For the year ending 31 December, analysts are forecasting EPS of 52.7p on a pre-tax profit of £14.8bn. For 2018, further growth is expected. Analysts have pencilled in earnings growth of 4%. As well as steady earnings rises, shares in HSBC also offer a dividend yield of 5.2%.

However, following the company's rapid share price rise over the past year, the stock now looks expensive. The bank's forward P/E of 13.9 is around a third higher than the financial services sector average of 10.4.

Considering HSBC's premium valuation, I'd sell the bank in favour of 'secret' turnaround stock Goodwin(LSE: GDWN).

This engineering group has, like the majority of its peer group, seen its earnings collapse following the oil & gas industry slump that's been unfolding since 2014. After hitting a high of £19m in 2014, net profit slumped to just £6m for fiscal 2017. Over the same period, EPS fell by 70%.

But it looks as if this slump is only temporary, and I believe that Goodwin could be a better buy than HSBC as a result.

Rising profits

According to its interim results release for the six months to 31 October, published today, some green shoots are starting to appear in the company's growth outlook. Pre-tax profit ticked higher to £6.1m from £6.05m year-on-year. Commenting on the rest of the year, management noted that "we expect to see the Group profitability for the second half of the year starting to move forward again" thanks to an improvement in trading.

Even though no City analysts are covering the company, I believe that this could be just the start of its comeback.

Benefitting from global trends

The global oil & gas market is showing signs of growth, and as companies start to spend again, Goodwin's earnings should make a recovery.

Since 2015, according to consultancy Wood Mackenzie, almost $1trn has been removed from projected global capex plans thanks to lower oil prices, hitting oil service companies like this hard. However, the consultancy expects spending to rise 15% this year for both unconventional and deepwater projects compared with 2017 levels. A separate survey from Barclays forecasts an 8% year-on-year rise in global upstream spending in 2018.

A pick-up in spending will helpfully translate into revenue and earnings growth for Goodwin. As the company's recovery gains traction, I believe that it could be a better buy than HSBC.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Goodwin and HSBC Holdings. 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.

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