Will HSBC Holdings(LSE: HSBA) turn out to be a profitable investment for 2019 and for the decades beyond? I think so, and here are three reasons why I like it.
It’s a bank
We’ve been through a horrible banking crunch, and there are many investors who have been put off the sector for life. The result is that the whole sector is lowly valued right now. And that’s something that has always puzzled me about the investment psyche, that people typically buy whatever everybody else is buying (which makes the share prices high) and ignore the shares shunned by the masses (which makes those cheap).
Sure, it can take some courage to go against market sentiment, in a strategy that many refer to as contrarian investing. And to be fair, the market is often right — as it actually was about banks when the worst of the financial crisis became apparent.
But, over the long term, banks have been exceedingly good at making lots of money for their shareholders, and I really can’t see the decades ahead as being any different.
Safety is relative, of course, but HSBC has a number of characteristics that mean it’s a good bit less susceptible to the things that worry banking investors. Back in 2007, blissfully unaware of the horrors about to unfold, the market was touting a possible ‘hard landing’ for the Chinese economy and the fallout that could cause for HSBC’s focus in that region.
But China carried on just fine, and of the London-listed banks, HSBC was the least affected by the crisis events of that year. The share price was hit badly, but it was nothing compared to the disaster that befell Royal Bank of Scotland, Lloyds Banking Group, and Barclays.
Then HSBC was shaken by the Brexit vote, but again not as badly as the others. The net result is that, since January 2007, RBS shares are still down a whopping 96%, Lloyds shares are down 84% and Barclays shares have lost 57%.
But HSBC shareholders are sitting on a share price loss of just 12%. And if you include dividends, they’re actually ahead — during the worst period for the banking sector in living memory.
The converse of HSBC’s less-bad share price performance is that it’s the most highly valued of the lot in terms of the usual valuation metrics. So, it might not be the best prospect for a profit in the medium term if the rest of the bunch should put in some kind of recovery.
After all, Lloyds, RBS and Barclays shares can be had on forward P/E multiples in the range of around seven to nine, when we’re looking at a P/E for HSBC of nearly 12 based on 2018 forecasts.
But I still reckon that’s good value, as HSBC’s mooted 5.8% dividends look very safe to me. And the bank really shouldn’t be facing any Brexit worries — I reckon such fears are overblown for all of them, but HSBC is surely the least at risk.
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.