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Warren Buffett wouldn’t touch these 3 dirt-cheap FTSE 100 stocks, nor would I

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Has the time come to give up on the big UK banks, which are some of the worst performing FTSE 100 stocks of the last 15 years? I’m beginning to think it is. 

I like to buy bombed-out FTSE 100 stocks as much as the next contrarian, but I have to draw the line at these serial flops. Every time I reckoned Barclays (LSE: BARC), HSBC Holdings (LSE: HSBA) and Lloyds Banking Group (LSE: LLOY) were about to bounce back, they let me down again.

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All three have been hit hard by the pandemic, and have struggled to recover. Measured over six months, Barclays and HSBC are both down around 40%, and Barclays is down 50%. They can’t blame all their misfortunes on Covid-19 either.

I’d beware of these FTSE 100 stocks

I’ve been wondering what the world’s greatest investor Warren Buffett would make of the UK banks right now. He isn’t averse to holding banking stocks, provided they are based in the US. Wells Fargo, US Bancorp and Bank of New York Mellon number among the top 10 holdings of his investment vehicle Berkshire Hathaway. He has spent recent months hoovering up shares in Bank of America.

However, I reckon Warren Buffett would struggle to justify buying a stake in FTSE 100 stocks Barclays, Lloyds or HSBC, even though all three FTSE 100 stocks are dirt-cheap right now.

Barclays has a price-to-book value of just 0.3, where 1 is usually seen as fair value. Lloyds stands at 0.4, and HSBC at 0.5. These are fat discounts. So why do I think Buffett would steer clear? His old saying applies here: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. The prices look wonderful, but the companies don’t. I wouldn’t even describe them as fair.

Lloyds is directly exposed to the fortunes of the UK, whose economy has fallen fastest among the major economies, and has Brexit to deal with as well. HSBC faces an even bigger challenge, as it is caught in the middle of the US-China face-off. I would tread carefully with both. Of the three FTSE 100 stocks, it may just be possible to make a positive case for Barclays, whose investment bank has been going strong.

Warren Buffett would be wary

At least these FTSE 100 stocks have a healthy capital position, thanks to provisions made after the financial crisis. So that’s something.

I have another worry about buying UK banks. Their balance sheets are so sprawling, you don’t know what you are getting. As Warren Buffett said: “Never invest in a business you cannot understand.” Most private investors have little hope of understanding what they get when buying Barclays, HSBC and Lloyds. They are effectively crossing their fingers.

All three big FTSE 100 stocks trade much lower than a decade ago. That reminds me of another famous Warren Buffett saying: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1”.

Investors have been losing money on Barclays, HSBC and Lloyds for around 15 years. That dismal run will take some turning around.

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