The share price of banking giant HSBC Holdings (LSE: HSBA) has fallen by about 12% so far this year, leaving it trailing behind the FTSE 100. The stock now offers a forecast yield of 6% for the current year, with price/earnings ratio of about 12.
I would be happy to buy HSBC for its dividend income. But I wouldn’t expect big gains from a bank that’s already valued at £133bn and trades at a small premium to its book value.
Another concern is that although banks’ balance sheets appear to be much stronger than they were before the financial crisis, the market remains unconvinced. Banking stocks have headed steadily lower this year, despite rising profits. I think there’s a risk that total shareholder returns from this sector could lag the wider market for some time yet.
For this reason, I’m starting to focus my attention on finding opportunities among small-cap stocks, which may have the potential to deliver much bigger gains.
Profit from play
One stock I hope to add to my own portfolio in the next few weeks is toy manufacturer Character Group (LSE: CCT). This company specialises in producing toys based on television, film and game franchises such as Peppa Pig, Dr Who, Pokémon and Minecraft.
The business was hit by the failure of Toys R Us, but things now seen to be getting back on track. According to the firm, trading during the second half of the year to 31 August showed “a return to its previous growth pattern”. Management is confident that profits for the year will “comfortably reach market expectations”.
We can see what these are by checking broker consensus forecasts, which show adjusted earnings of 39p per share this year, with an expected dividend of 21p. These numbers put the stock on a forecast P/E of 12.9 with a prospective yield of 4.2%.
That looks like a good entry point to me for this company, which generated a stunning return on capital employed of 50% last year. I rate these shares as a buy.
A deep value bargain?
My final stock is Barbados-based luxury resort operator Elegant Hotels Group (LSE: EHG). Shares in this firm have fallen by about 25% so far this year. The decline seems to have been triggered by news of a 23% fall in adjusted pre-tax profit for 2017, followed by a dividend cut.
However, the shares are up by 5% at the time of writing following a positive trading update. The company says that bookings for next year are currently “ahead of the same period last year”.
Management also notes that recent tourist taxes implemented on flights and hotel stays in Barbados have not yet had a material impact on profits.
At the last-seen price of about 69p, Elegant shares offer a forecast dividend yield of 4.6% and trade at a discount of about 30% to their tangible net asset value of c.100p per share.
Analysts expect the group’s earnings to rise by 7% to 8.7p per share next year, putting the stock on a modest P/E of 7.5. It’s also worth noting that the company received an (unsuccessful) takeover approach in December 2017.
In my view, Elegant looks attractive as an income buy and a potential bid target. I’ve added the shares to my watch list for further research.
