Investment guru Warren Buffet once remarked, "When it comes to socks or stocks, I like buying high-quality merchandise when it is marked down”. In other words, the trick for investors and traders is to find premium companies that are languishing around in the share price discount bin.
What then to make of banking giant HSBC [HSBA.L]? Despite a market cap of around £113bn and an almost permanent place on the FTSE 100, the share price appears to be struggling.
“While it is not a junk stock, it is still lower quality than other investment candidates out there,” Jack Brumby writes in Stockopedia. “These kinds of companies are perhaps more likely to encounter financial troubles or market share erosion in the years ahead.” The publication has given HSBC’s share price a quality rank of 49 based on returns, fundamentals and risk.
“While it is not a junk stock, it is still lower quality than other investment candidates out there” - Stockopedia's Jack Brumby
The case against HSBC
HSBC has seen its shares price plummeted from a peak in January 2018 of 796p to 556p as of close on 3 December. In its most recent earnings report in October, the bank announced profit before tax for the first nine months of 2019 of $17.2bn – a 4% year-over-year increase. Meanwhile, annualized return on tangible equity (ROTE) was at 9.5%, but HSBC said that it no longer expects to reach its target of greater than 11% by 2020, stating that “the outlook for revenue growth is softer than [it] anticipated at the half-year”.
“Just as it is very hard to turn around a super-tanker in midstream, management are finding it very difficult to achieve a change of direction at Europe’s biggest bank HSBC,” Russ Mould, investment director at AJ Bell, told CityAM.
“Along with the herculean task of bringing simplicity to a business as large and complex as HSBC, the bank has no control over factors such as a US-China trade war, Brexit and the escalating political tensions on its home turf in Hong Kong.”
S&P Global Ratings also recently revised its outlook on HSBC to negative, following HSBC’s announcement it would not achieve returns target in 2020.
“We understand that this will result in a further restructuring of the business model. This will be the third iteration of restructuring, following material changes in 2011 and 2015.”
Is there an upside?
The ratings agency said it acknowledged the “deposit-heavy institution” faced difficult operating conditions from the low interest-rate environment, but also noted the resilience in the banks two largest markets, Hong Kong and the UK.
Despite its revision, S&P did highlight some other positives. “In some respects, we view favourably the proactive approach of HSBC's new management team, since future credit conditions – such as asset quality – could become less benign.”
|PE ratio (TTM)||8.65|
|Quarterly Revenue Growth (YoY)||-6.20%|
HSBC share price vitals, Yahoo Finance, 04 December 2019
It said that the bank, unlike some of its competitors, had “never come close to reporting an annual loss,” pointing to the strength of its Asia-Pacific franchises, which it expects to continue to help drive growth.
Rupert Hargreaves, writing in The Motley Fool in March, likewise considered that HSBC should be considered in terms of its international credentials.
“Shares in HSBC might look expensive compared to the rest of the UK banking sector, but I don’t think this is a fair comparison. The bank should be valued in comparison to its international peers, rather than domestic UK banks,” Hargreaves said.
“Shares in HSBC might look expensive compared to the rest of the UK banking sector, but I don’t think this is a fair comparison. The bank should be valued in comparison to its international peers, rather than domestic UK banks” - The Motley Fool's Rupert Hargreaves
“In the event of a messy Brexit, HSBC’s international businesses will help the company ride out the turbulence."
Undoubtedly, HSBC will continue to feel the pressure from the ongoing political and social disruption in Hong Kong and in Europe. But, under interim group chief executive Noel Quinn the bank is being proactive in changing both its performance and reputation with investors.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.