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Why Standard Chartered PLC Is A Better Buy Than Prudential plc And Legal & General Group Plc

When it comes to financial stocks, there is a huge choice available to investors. Furthermore, with the banking sector still enduring a challenging period due to the constant fines and allegations of wrongdoing, the valuations on offer within the banking space are hugely attractive. Of course, the insurance and diversified financials sector also holds great appeal and, as such, it is worth having an exposure to it within Foolish portfolios.

Significant Potential

One stock that is trading at a super-low price level is Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US). For example, it currently has a price to earnings (P/E) ratio of just 11.8, which is considerably below the FTSE 100’s P/E ratio of around 16. As such, an upward rerating could be on the cards.

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Of course, Standard Chartered is going through a highly uncertain period at the present time. For example, it is in the midst of a management change that will see a smaller, more focused board running the bank and, with the Chinese economy still experiencing a soft landing, the outlook for the bank’s bottom line is not particularly impressive. In fact, Standard Chartered is expected to see its bottom line fall by 7% this year, which is clearly disappointing news for its investors.

However, looking further ahead, Standard Chartered has considerable potential. The Chinese economy holds great promise for banking stocks as it transitions towards a consumer-led economy that requires significant amounts of credit – for both businesses and individuals. And, with it having poured significant resources into Asia in recent years, Standard Chartered could be well placed to take advantage. Moreover, with Standard Chartered forecast to increase its bottom line by 14% next year it appears to offer growth at a very reasonable price, since it has a price to earnings growth (PEG) ratio of just 0.7.

Sector Peers

Clearly, the likes of Prudential (LSE: PRU) and Legal & General (LSE: LGEN) also have enticing futures ahead of them. However, even though Prudential is also in the midst of changing its CEO, it does not trade on as low a multiple of earnings as is the case with Standard Chartered, with the former having a P/E ratio of 14.6, for example.

Of course, Prudential does have an excellent track record of growth, with it increasing its bottom line in each of the last five years, but its PEG ratio of 1 is almost 50% higher than that of Standard Chartered, thereby making is less appealing.

Similarly, Legal & General may have a P/E ratio of just 14.2 and a PEG ratio of 1.1, but it lacks appeal compared to Standard Chartered. Furthermore, it does not have the same level of exposure to Asia as Standard Chartered does and, in the long run, may not offer quite the same growth potential.

Looking Ahead

Certainly, Legal & General’ double digit growth prospects and a yield of 4.9% may compare favourably to those of Standard Chartered, which has a similar rate of growth for next year and a yield that is only slightly lower at 4.7%. However, when it comes to which of the three could deliver the highest capital gains over the medium to long term, Standard Chartered is considerably cheaper than Prudential and Legal & General and, as such, looks most likely to benefit from an upward rerating moving forward. Therefore, while all three are great stocks, Standard Chartered is the one I would buy first.

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Peter Stephens owns shares of Standard Chartered. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.