Why Are Financial Stocks Like HSBC Holdings plc, Amlin plc, Friends Life Group Ltd And Tullett Prebon Plc So Cheap?

Over the last few months, my personal portfolio has become increasingly weighted towards financial stocks, many of which have now become too cheap to ignore.

HSBCAt the mega-cap end of the scale, a good example of this trend is HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US).

HSBC is in good financial health, and forecasts suggest it will deliver earnings growth of 12% in 2014 and 10% in 2015, along with dividend growth of around 8% per year.

Despite this strong outlook, HSBC shares trade on a forecast P/E of just over 11, and offer a generous 5.1% dividend yield. That seems cheap, to me.

In this article, I’m going to highlight three UK mid-cap financial stocks I believe are all strong buys in today’s market.

1. Amlin

Insurer Amlin (LSE: AML) specialises in areas such as property, marine and aviation insurance.

Amlin’s share price has risen by 172% over the last 10 years, but despite this, the firm’s shares trade on a forecast P/E of just 11.3, and offer a 5.6% prospective yield. Amlin consistently returns excess profits to shareholders, and the firm’s dividend has risen by an average of 9% per year since 2008.

2. Friends Life Group

Friends Life Group (LSE: FLG) focuses on managing closed books of life insurance and pension products.

Like its peers, Friends Life was hit hard by March’s Budget announcement that retirees would no longer be required to buy an annuity decimated share prices across the sector.

However, I believe this reaction was overdone, and represents a buying opportunity. Friends Life shares currently trade below their book value and offer a 6.4% prospective yield, which should be covered by earnings.

3. Tullett Prebon

Interdealer broker Tullett Prebon (LSE: TLPR) specialises in negotiating deals between buyers and sellers of unlisted financial instruments, like derivatives.

Low market volatility, low interest rates and regulatory changes mean that the outlook for Tullett is subdued. The imminent departure of charismatic long-time CEO Terry Smith isn’t helping, either.

However, Tullett is adapting, and I believe the bad news is already in the firm’s share price. Tullett has net cash, and currently trades on a forecast P/E of 8, with a well-covered 6.1% prospective yield. In my view, it’s a classic value buy.

Aren’t they cheap for a reason?

History suggests that buying cheap shares is the most reliable way to beat the market. There’s always a downside risk, but most big firms adapt and survive.

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Roland owns shares in HSBC Holdings, Friends Life Group and Tullett Prebon but not Amlin.