Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
Today, I’m going to tell you why I believe HSBC Holdings (LSE: HSBA) (NYSE: HBSC.US) is currently in the bargain basement.
Asset valuation
My preferred financial metric for valuing banks is price-to-tangible net asset value (P/TNAV). If you can buy £1 of assets for less than a quid, you’re on to a winner.
Of course, the value of the assets on the balance sheet must be a fair reflection of their worth — and we all know that banks have been writing down the value of their assets with monotonous regularity since the 2008/9 financial crisis.
However, HSBC has recognised more losses than its rivals, and is ahead of the field on cleaning up its balance sheet. Yet on a P/TNAV basis the group ranks cheaper (1.20) than two of its Footsie peers: Standard Chartered (1.22) and Lloyds (1.46).
At what price a bargain?
In a previous article, I benchmarked Lloyds against Wells Fargo, a company in which Warren Buffett has a $24bn stake, and which he holds up as an exemplary ‘traditional’ bank.
I came up with a bargain P/TNAV of 1.11 for Lloyds (a share price of just over 56p). Central to my calculations was historical return on assets (ROA). Lloyds’ ROA in the years before the financial crisis was 0.85%.
HSBC’s ROA over the same period was 1.01%. If I adjust what I considered to be Lloyds’ bargain P/TNAV of 1.11 proportionally for HSBC’s superior ROA, I come up with a P/TNAV for HSBC of 1.32. Dollar/sterling exchange rates impact on HSBC’s TNAV (the bank reports in dollars), and I get a share price range of 689p to 723p based on the range of currency fluctuations since HSBC’s last reported results (4 August).
HSBC’s shares are trading at 662p at the time of writing. I therefore have the company currently in the bargain basement, and would see it as a bargain up to at least 689p.
