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The Surprising Buy Case for HSBC Holdings plc

Today I am looking at an eye-opening reason why HSBC Holdings (LSE: HSBA) (NYSE: HBC.US) is a shrewd pick for investors looking for a blue-chip bargain with both excellent earnings growth and dividend prospects.

Recent weakness provides fresh buying opportunity

Shares in HSBC have fallen sharply since the start of August, a situation not helped by a mid-month update which revealed revenue pressure, and the share price was recently dealing at an 11% discount to levels seen at the start of last month.

But in my opinion, the bank is a prime candidate for a significant upward re-rating, its huge exposure to lucrative developing markets and cross-division strength ready to unlock stunning earnings potential.

HSBC advised in last month’s update that revenues slipped 7% in the initial six months of 2013, to $34.4bn. The firm reported a 3% decline in loans and advances, while customer deposits slipped 2% during the period, heightening fears of waning power on High Streets across the world and consequently a plunge in future earnings.

Still, the update underlined the massive strides the firm is making in key geographies, most notably those in Asia.

While pre-tax profit across the group rose 10% in January-June, mainly owing to fewer regulatory fines and lower bad loan provisions, activity in emerging markets continues to gallop higher.

In Hong Kong and the Rest of Asia, profits rose 12% and 16% respectively. The effect of disposals in Asia has failed to whack earnings as demand for the bank’s retail and investment banking products continues to head higher.

Indeed, broker Investec expects earnings per share to shoot 36% higher this year to 62p, before advancing an additional 7% in 2014 to 67p.

These projections leave the bank trading on a P/E rating just above my bargain watermark of 10 for both 2013 and 2014, at 10.9 and 10.1. Indeed, HSBC’s stunning growth estimates for the current year result in a price to earnings to growth (PEG) rating of 0.3, well within value territory below 1.

And this strong earnings growth is expected to keep annual dividend growth stamping higher over the medium term. A current dividend estimate of 33.2p per share for 2013 produces a yield of 4.9%, and this is expected to leap to 36.9p per share in 2014 and a corresponding yield of 4.9%. This compares extremely favourably with an average forward yield of 3.8% for the complete banking sector and 3.2% for the FTSE 100.

Zone in on other spectacular stocks

And although I believe HSBC Holdings is an excellent, well-rounded stock market selection, there are a whole host of other FTSE 100 winners just waiting to bolster your investment returns. In this regard I strongly recommend that you check out these recommendations from veteran fund manager Neil Woodford which are primed with explosive growth potential.

Woodford -- in charge of UK Equities at Invesco Perpetual -- has more than 30 years' experience in the industry, and boasts an exceptional track record when it comes to selecting stock market stars.

This exclusive report, compiled by The Motley Fool's crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.

> Royston does not own shares in HSBC Holdings.