I’m on the lookout for cheap shares with the FTSE 100 down considerably from its summer highs. It’s worth remembering that the index has been hauled upwards this year by oil and gas stocks, and previously mining stocks. For example, while the index is down around 2%, its most valuable stock, Shell, is up 50%.
Today I’m looking at Hargreaves Lansdown (LSE:HL) — a UK-based investment supermarket — and Barclays (LSE:BARC) — an unloved British banking giant. Both these stocks trade with much lower multiples than just a few months ago, but that’s not the only reason I like them.
A cut-price growth stock
Hargreaves Lansdown is still attracting new customers despite a cost-of-living crisis that’s putting pockets under pressure. Some 1.7 million people now use the direct-to-consumer platform. In its October update, the firm said it had brought in net new business of £700m in the quarter to 30 September, with assets under administration reaching £122.7bn.
However, I fear that in the coming months, the Bristol-based company may struggle to attract new customers and funds. In fact, if the economic downturn is very bad, we’ll likely see net outflows. And it’s because of this sentiment that Hargreaves is now trading with a price-to-earnings (P/E) ratio of 15 — above the index average but far below where the company’s P/E was previously.
But that’s the short run. In the long run, I see Hargreaves benefiting from a movement towards self-managed investment. As many as one in 10 people started investing during the pandemic and more and more are looking to take charge of their own investments.
And as an added short-term bonus, Hargreaves is set to make £200m in the next year as a result of higher interest rates that aren’t being passed onto customers in their entirety. The firm has increased its overall revenue margin guidance, driven by a rise in cash margins of between 130 and 150 basis points.
I already own Hargreaves shares, but they’re down 50% over 12 months, so I’m buying more. The 5.2% yield certainly aids my passive income goals.
The unloved bank
Barclays trades at just four times earnings and offers a 4.1% dividend yield. It indicates that this stock is either hugely undervalued or something is wrong. In this case, Barclays is facing some challenges — a few more than it peers. That’s largely due to securities sold in error. The trading blunder saw it agree to a penalty of $361m with US regulators.
Economic challenges are also eating into profit margins with bad debt impairments rising considerably. Impairment charges for the third quarter rose to £381m, up from £120m a year ago. It’s down 25% over the year as a result.
However, banks have one major tailwind right now, and that’s higher interest rates. In Q3, the net interest margin — the difference between rates on loans and deposits — reached 2.78%, from 2.53% a year before. And this makes a huge difference to earnings. Group income rose 17% to £6.4bn during the quarter.
Once again, I already own shares in Barclays, but I’m buying more. Yes, there are economic challenges and this isn’t good for credit quality, but I see higher margins propelling revenue generation over the next year.
