The stock market correction took many investors by surprise in March. Financial stocks were worst hit as concerns spread from US banking stocks. The FTSE 100 is now down 5% over one month, and is flat over the year.
I’m always on the lookout for value — stocks trading at a discount versus their intrinsic or book value. However, even before the correction, I considered that many UK-based financial stocks were already trading at a discount.
So, with share prices pushing down in recent weeks, I’m buying more of my top picks. Here are three huge opportunities.
Barclays
Barclays (LSE:BARC) is down around 20% over a month, amid concerns about unrealised bond losses and a domino effect in the financial sector. However, Barclays is very different to the collapsed Silicon Valley Bank.
The UK institution has a more diverse set of depositors and more diverse bond holdings than SVB. Liquidity is solid and it’s worth noting that the vast majority of bonds will likely be held until maturity — even if their value has fallen during this monetary tightening cycle.
Very high interest rates aren’t ideal for banks, as good debt becomes bad and borrowing slows. However, we’re near the BoE’s top rate now, and we should see interest rates return to more optimal levels soon — maybe 2%-3%.
Barclays trades with a price-to-earnings (P/E) ratio of just 4.45, has a dividend yield of 5.2% and Discounted Cash Flow calculations suggest the bank could be undervalued by 75%.
Hargreaves Lansdown
Hargreaves Lansdown (LSE:HL) stock is down 8% over the month. In fact, this stocks and shares supermarket platform has been on a downward trajectory for some time having peaked during the pandemic.
While transaction volume has fallen, some investors are also concerned about the long-term viability of the company’s fee-based revenue streams. One American peer has stopped charging fees altogether and now focuses on earning interest on customer deposits.
This could be the way forward, and it’s worth noting that transaction fees only represent a small percentage of Hargreaves’s total revenue. Lowering fees — or dropping them entirely as it has done with Junior ISAs — could bring in more clients, pushing up interest earnings on customer deposits.
The P/E has fallen to 15 — not too expensive for a tech stock — and the dividend yield is 5.15%.
Legal & General
Legal & General (LSE:LGEN) shares are down 10% over a month. This is despite the firm announcing in early March that operating profit had risen 12% to £2.52bn in 2022, beating consensus expectations of £2.46bn.
Earnings per share also rose 12% to 38.33p. The only issue was that the investment arm had underperformed amid the volatile conditions. And crucially, over the past year, the company’s solvency II ratio also increased by 49% to hit 236%.
For me, the correction offers a great opportunity to buy a solid, high-yielding stock, which will benefit from positive trends in bulk purchase annuity solutions.
Challenging bond market conditions pose risks, but I think the positives outweigh the risks. It’s undervalued with a robust balance sheet and strong cash generation.
It trades at just six times earnings with a huge 8.4% dividend yield.
My take
I see considerable opportunity for value investors at the moment. I’ve increased my positions in all three of the above stocks.
