Although it is possible to manage the risk of loss when it comes to investing, it is impossible for it to be eradicated completely. Certainly, company-specific risk can be diversified away, but a stuttering economy can cause even the highest quality companies and best performing stocks to experience declining investor sentiment.
Of course, the finance sector remains relatively high risk. For starters, we are only a few years out of a major recession and, with the global economy still facing challenges in the Eurozone and a slowdown in growth in China, the outlook is far from certain. Furthermore, financial companies continue to suffer from heightened political risk, with fines, rule changes and increased taxation acting as a brake on their performance.
However, as well as risk there is also potential reward and one financial stock that offers a considerable amount of the latter is Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US). It is currently undergoing significant change, with a new management team set to tweak the bank’s strategy, while a Chinese economy that is not growing as quickly as many investors would like it to is holding back performance in the short run.
Despite this, Standard Chartered’s present valuation offers considerable upside. For example, while the FTSE 100 has a price to earnings (P/E) ratio of around 16, Standard Chartered has a P/E ratio of just 11.8. Certainly, that is somewhat understandable when you consider that the bank’s bottom line fell by 28% last year. However, that level of performance is not set to be repeated moving forward and, in fact, Standard Chartered is expected to post bottom line growth of 14% next year, which makes its current valuation very difficult to justify.
While Standard Chartered’s growth prospects are impressive, they are far less appealing than those offered by fellow banking stock, Virgin Money (LSE: VM). Certainly, the latter lacks the size, scale and exposure to fast-growing markets of the former, but over the next couple of years it is set to take advantage of low interest rates to grow its loan book, customer base and, most importantly, its profitability.
For example, Virgin Money is expected to post a rise in net profit of 52% next year. This is a stunning rate of growth and puts the bank on a price to earnings growth (PEG) ratio of just 0.2. Furthermore, its price to book (P/B) ratio of around 1.5 also indicates that it offers excellent value for money right now.
Meanwhile, recent news flow for spread betting firm, Plus500 (LSE: PLUS), has been hugely disappointing and has caused a fall in its share price of 57% in the last month alone. The reason is a freezing of its UK customer accounts by the regulator, with account opening checks apparently not being successfully completed. As such, Plus500 is set to experience increased costs as it seeks to rectify the issue, as well as lost revenue from reduced transaction volumes.
Clearly, the market is warming to the longer term outlook for the business, since its shares have risen by as much as 18% today. However, the impact on the company’s reputation and its future financial performance is a known unknown. As such, and while it remains a company that has a bright future, it may be prudent to wait for more information before buying a slice of it.
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Peter Stephens owns shares in Standard Chartered