While the FTSE 100 may be close to its all-time high, the financial services sector remains exceptionally cheap. Certainly, banks such as HSBC (LSE: HSBA) (NYSE: HSBC.US) may have endured a challenging period, which included the global financial crisis and is now dominated by the wider sector facing allegations of wrongdoing and potential fines. As such, it is perhaps understandable that investor sentiment in the sector is at a relatively low ebb.
Similarly, insurance stocks such as Admiral (LSE: ADM) and diversified financial companies such as Standard Life (LSE: SL) are also not among investors’ most popular stocks at the present time. For example, their shares are up by just 1% in the last year, which is only a slightly better performance than HSBC, which is flat in the last twelve months.
Valuations
However, their future share price performance could be much, much stronger. That’s largely down to their extremely appealing valuations, which indicate that there is considerable upside on offer. For example, while the FTSE 100 has a price to earnings (P/E) ratio of just under 16, HSBC currently trades on a P/E ratio of just 11.6. This indicates that there could be as much as 38% upside from HSBC’s current share price, which is very realistic since the bank is expected to grow its bottom line by 6% next year, which is roughly the same growth rate as the wider index.
Similarly, Standard Life has huge value appeal. It is forecast to grow its bottom line by two-thirds this year, and by a further 19% next year. Clearly, both of these growth rates are way in excess of that of the FTSE 100 and, despite this, Standard Life trades at only a slight premium to the FTSE 100, with it having a P/E ratio of 18.2. This equates to a PEG ratio of 0.3, which indicates that its shares could move considerably higher.
Meanwhile, Admiral appears to be fully valued at the present time based on its P/E ratio, with it currently having a rating of 16.1. However, its track record of dividend growth means that it could become increasingly popular with yield hungry investors, with Admiral having increased its shareholder payouts at an annualised rate of 25% during the last four years. That’s an astounding rate of growth and puts Admiral on a yield of 6%, which indicates that its shares offer good value for money while the FTSE 100 has a yield of around 3.5%.
Looking Ahead
Clearly, all three stocks have superb capital gain potential and appear to be well-worth buying at the present time. If you can only afford to buy one, though, then Standard Life’s stunning rate of growth and super-low valuation mark it out as the standout buy, with its poor share price performance in the last year unlikely to continue in 2015 and beyond.
