Banking giant HSBC (LSE: HSBA), miner Antofagasta (LSE: ANTO) and oil equipment firm Hunting (LSE: HTG) are three companies that are decidedly out of favour with the market.
HSBC’s shares had recovered from the depths of the financial crisis to over £7 before 2009 was out. Progress was stop-start thereafter, but they did advance to a post-crisis high of over £7.50 during 2013. However, it’s been all downhill since, and the shares are trading at not much above £5 today.
Antofagasta’s shares reached an all-time high of over £16 towards the end of 2010 amidst booming metals prices. The subsequent decline of the shares has been relentless, and we’re currently looking at about £5.25.
Meanwhile, Hunting’s shares reached a high of around £10 in 2012, but have plummeted as the oil price has cratered since last year. The shares are now trading at about £3.50.
Substantial losses
Clearly, investors who piled into these companies when optimism was high are currently sitting on substantial losses. However, I believe there are good reasons for thinking that underwater shareholders can look forward to recovery and that investors today can look forward to super returns.
China, of course, has played a not insignificant part in driving the shares of these three companies into unloved territory. Levels of debt and the possibility of a financial crisis in China have naturally led to worries about HSBC, with its large exposure to the People’s Republic and Asia generally. At the same time, China’s slowing growth and reduced hunger for natural resources are part of the currently imbalanced supply/demand relationship in metals and energy that is directly hurting miners, such as Antofagasta, and indirectly hurting companies that service natural resources industries, such as Hunting.
The pace of China’s growth, the transition to a more western-like consumer economy and the maturing of the country’s financial system were never likely to be smooth — and that is proving to be the case. However, in the long term, China, as well as India and Africa, should provide tailwinds for banks, miners and oil equipment and services companies.
Favourable long-term outlook
But, in addition to what I see as a favourable long-term macro outlook for these industries, I believe HSBC, Antofagasta and Hunting are particularly attractive individual picks within their industries.
At the moment UK-focused banks, such as Lloyds, are basking in the sun. That won’t always be the case. There will be periods in the coming decades when UK banks will struggle and HSBC will reap the benefits of its wide international exposure.
The market’s immediate worries about HSBC have depressed the shares to the extent that the stock trades on a forward price-to-earnings (P/E) ratio of less than 10 with a prospective dividend yield of 6.5%. While HSBC is still in the process of restructuring itself for the post-financial-crisis world, and the dividend isn’t entirely safe, I believe the bank could prove to be a great long-term investment.
Copper miner Antofagasta has long benefitted from the controlling Luksic family’s prudent, far-sighted approach to running the business. The company has been able to use the strength of its balance sheet to take advantage of the hardship currently being suffered in the industry. In July, Antofagasta announced a $1bn acquisition of a 50% stake in the world-class Zaldívar copper mine in Chile, the Board describing the move as “a rare opportunity to acquire a substantial interest in an established, low-cost mining operation that generates strong cash flow”.
In the prevailing depressed environment, Antofagasta’s current-year P/E is an eyebrow-raising 34, but, like the Luksic family, I take a long-term view, and see value in the shares at the current level.
Hunting has similar qualities to Antofagasta. Family control of this company goes back to its founding in 1874. Hunting has been through many changes in its long history, the family never having been afraid of shifting the focus of the business from time to time towards areas where it has seen the best opportunities for long-term growth. The current slump in the oil price has come towards the end of heavy investment in one of these repositioning phases.
Hunting trades on the same high current-year P/E as Antofagasta. But again, taking a long-term view, I see value in the company’s shares at today’s level.
