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How HSBC Holdings plc And BP plc Could Resurge In 2016

Like many other investors, I want to look after my hard-earned financial gains without risking the lot on casino-style shares that promise big gains but which also come with big risks.

That’s why I’m drawn to large-cap firms, particularly those in the FTSE 100. These leviathans tend to be mature in terms of their growth curve, their business model is proven, their balance sheets are often robust, and such companies have often stood the test of time.

Lower-risk investing?

I don’t expect to shoot the lights out with big caps, but I am looking to protect the downside to my portfolio. Master investor Warren Buffett’s first rule of money management is, famously, “don’t lose”‘, and I know I’m not alone in looking to the main index on the London market to try to achieve that aim.

FTSE 100 firms can put on a surprising turn of speed, so outsized performance — or underperformance — is still possible within the index. After all, in terms of the range of sizes of firms it contains, the FTSE 100 is deep — the firm with the smallest market capitalisation comes in at around £3 billion, while the largest is about £106 billion. There’s considerable scope for a growing FTSE 100 company to rise in the ranks of the index, so investors can theoretically enjoy the benefits of size, along with potential capital gains too.   

Growth isn’t the only model available in the FTSE 100 though. The index also contains many cyclical firms whose fortunes tend to ebb and flow in lock step with economic cycles. That effect can lead to undulating share prices, and timing the jump into and out of those firms can be just as lucrative as picking a grower and sticking with it. With a shorter term swing-trading strategy in mind, I’m looking at two of the largest constituents of the FTSE 100, which also happen to be amongst the most cyclical — banking firm HSBC Holdings (LSE: HSBA) and oil company BP (LSE: BP).

A disappointing year

Despite recent bounces in their share prices, 2015 has been a disappointing year for investors in HSBC and BP — HSBC is around (12%) down since January and BP is flat. As such, and bearing in mind that both firms have been under the hammer for some considerable while, I’m tempted to look for contrarian opportunity — maybe 2016 will be the year that BP and HSBC really swing back with a vengeance. Riding out any such cyclical up-leg in these firm’s fortunes could be profitable.

In order to make a successful contrarian investment I think it’s necessary to look for three things:

1) a share price that has fallen,
2) operational difficulties, and
3) a low, or fair, valuation.

I’m seeing all three conditions satisfied with BP and HSBC. However, there’s also a fourth, and essential, condition that relates to timing a jump into a contrarian position and that is,

4) Evidence that conditions can reverse.

What can go right from here?

I reckon a reversal in a firm’s share price can presage an improving outlook — share prices seem to have a mystical, magical ability to see ahead of the facts. Both BP’s and HSBC’s share prices have turned upwards recently, so that’s a good sign.

BP is getting to the stage where it can put its Gulf of Mexico disaster behind it, but the big operational drag now relates to the fallen price of oil, which is causing the firm all kinds of headaches as the company’s ability to invest is crimped due to falling cash flows.

That said, at some point oil will reach its floor and that might be good enough to justify an investment in BP. Stability in the price of oil will allow the firm to achieve equilibrium in its operations, which can be tailored to fit. If we are there already with the oil price, 2016 could prove to be a good year for BP’s shareholders.

HSBC’s troubles relate mainly to weakness in its core Asian markets and regulatory headwinds. I’m encouraged by the governor of the Bank of England, Mark Carney’s, recent comments where he said his job on raising capital requirements for banks is nearly done. Maybe that’s a sign that regulatory pressures might already have peaked since last decade’s credit-crunch. On top of that, at some point Asian markets might pick up. Any improvement from here would be good for HSBC, maybe 2016 will be the year that starts to happen.

Nothing is certain

Nothing is certain with HSBC Holdings and BP and we should bear in mind their cyclicality, which is capable of taking the shares both up and down. If you are looking for something steadier, but you still want to look after the downside and the upside of your investments,  then you might like to consider the firms covered our analysts' special wealth report 5 Shares To Retire On.

You can get this report free by clicking here.

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Kevin Godbold 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.