Financial stocks are being punished as the Greek crisis deepens. HSBC (LSE: HSBA) (NYSE: HSBC.US), Aviva (LSE: AV) (NYSE: AV.US) and IG Group (LSE: IGG) were already starting to look interesting in recent weeks, and today’s market sell-off only makes them more attractive.
While the shares of these three companies may or may not go lower in the short term, valuations at current levels suggest this could be a good time to buy for long-term investors.
There was once a time when investors sung the praises of geographical diversification. Not so with banks, these days, it seems. Like holidaymakers who go to Bognor Regis fearing a dose of runny tummy if they venture abroad, investors seem to be flocking to homely Lloyds and shunning international HSBC.
Lloyds is a comfortable option right now, because the UK economy is doing relatively well, and the bank is approaching a high level of efficiency on such things as the cost:income ratio and return on equity. Meanwhile, the rest of the world isn’t firing on all cylinders, and the ongoing restructuring of HSBC has yet to deliver the kind of efficiency Lloyds is currently demonstrating.
Nevertheless, in the long-term (decades), I believe HSBC’s exposure to higher growth regions of the world, and its current lowly rating as it works to become a more efficient operator, give it the potential for higher returns for investors in the future. Intuitively, unloved HSBC — trading at around tangible book value (compared with fashionable Lloyds at one-and-a-half times book) — looks a stock about which we should, as Warren Buffett says, “be greedy when others are fearful”.
Insurer Aviva is another financial company that is still in the midst of restructuring, following the 2008/9 global financial meltdown. Aviva’s £5.6bn acquisition of rival Friends Life earlier this year complicates things, but the rationale for the deal looks good, based on expected cost-saving synergies, cross-selling opportunities and so on.
The merger is expected to produce a modest 5% dip in Aviva’s earnings this year, but analysts are forecasting growth of 12% in 2016, as the benefits of the combined group come through. The forecast for 2016 puts Aviva on a bargain-basement price-to-earnings (P/E) ratio of 10, and there’s a prospective 4.8% dividend yield to boot.
There are, of course, always execution risks when a company makes a major acquisition, but Aviva’s CEO Mark Wilson has a strong record of successfully restructuring and repositioning businesses.
Spread-betting firm IG Group tends to do well when markets are volatile and not so well when they’re becalmed. The latter was the case for long periods of IG’s latest financial year to 31 May (for which it will report results next month). Earnings are expected to dip 8%, but analysts are forecasting a big rebound of 20% in the coming year.
The earnings growth rate coupled with a P/E of about 16.7, gives IG an attractive P/E-to-earnings-growth ratio of less than 0.9. A rate below 1.0 implies good value for money. Also appealing is the company’s prospective 4.3% dividend yield.
While IG’s earnings can vary in the short term, depending on the state of the markets, the group’s long-term growth record over its 40-year history is excellent, and there appears no reason to suppose it cannot continue.
G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.