Ever see a stock and think it’s a great company, but the price is way too high? For a long time, that was my take on the Hargreaves Lansdown (LSE: HL.) share price.
Not too long ago, we were looking at a price-to-earnings (P/E) ratio of over 35. And even with earnings growth on the cards, that just looked too rich.
But things have changed, and it only took a pandemic and a stock market crash to make it happen. The share price has now tumbled 60% over five years.
What it means
That drops the forecast P/E to under 12. Oh, and it pushes the prospective dividend yield up to 5.6%.
In a year when forecasts show a bounce back to earnings growth, I think that could make Hargreaves Lansdown shares one of the FTSE 100‘s hottest long-term buys.
We had a taste of how the year is going on 19 October when the investment firm gave us a Q1 update.
The quarter saw an increase in new business of £0.6bn, with revenue up 13% to £184m.
It’s all down to 8,000 new clients coming on in the period, which sounds good. But the share price fell 5% in early trading.
Why the fall?
The growth in client numbers is actually only very small compared to the total number of active clients, at 1.8m. It’s positive, but it looks like the market was expecting something a bit better.
CEO Dan Olley, spoke of the rise coming “despite the macroeconomic backdrop and its ongoing impact on investor confidence and client behaviour.“
Clients are “looking to invest more in cash than risk-based investments,” he added. So a move towards safer, and possibly less profitable, services could also lie behind the poor reaction.
What next?
I fully expect a stock like Hargreaves Lansdown to be cyclical. And it’s one of those that I firmly believe could be a much better buy when stock markets are down.
The stock did become overvalued in the years up to 2019, in my view. Stock market optimism was high, and a lot of us thought the FTSE 100 could be set to soar way past 8,000 points.
But I think the downturn has done a good thing, at least with a long-term view. Overvalued stocks must hit a correction sooner or later. And sooner is surely better.
The big drop in the Hargreaves Lansdown share price more than qualifies as a correction. But is it overdone?
Time to buy?
I think it is. And it puts it firmly on my list of buy candidates now.
I think the biggest risk is that stocks like this could have further to fall before they turn around. The dip on Q1 update day seems to show how nervous shareholders are.
But I didn’t realise just how far the stock valuation had fallen. I do now, and I think the shares are too cheap. If they stay low, I could be buying.
