Bristol based Hargreaves Lansdown (LSE:HL) suffered more than most in the recent stock market correction, falling over 20%. The share price has now recovered to around 16% lower than before October and this could be a great buying opportunity. There are two reasons it fell so suddenly. Firstly it is valued very highly and premium stocks suffered the most during the correction. Secondly the unfortunate timing of a lukewarm trading statement added to the sell off of shares. Hargreaves Lansdown announced that net client inflows had slowed compared to the same period last year due to an industry wide slowdown. But it also said it is well placed for when market sentiment improves so I don’t think this trading statement is any cause for concern.
Is the price justified?
The stock market bears will say that with a forecast price-to-earnings (P/E) ratio of 30.9, Hargreaves Lansdown is still too expensive. But this is because growth stocks are misunderstood. Growth is a component of value, and high valuations are sustained as a company grows. If you look at the P/E range of Hargreaves Lansdown in the last 4 years there has been a low of 28 and a high of 46.8 so it has always traded at a premium. Over this time the share price increased by over 50% and paid a modest dividend so you would have missed out if you had been put off by the high price. Growing companies tend to outperform over an extended period of time and this is why momentum strategies are so successful.
I think Hargreaves Lansdown’s share price has a lot further to run as it has several advantages over the competition. For starters it has no branches and is completely online or over the phone, this means that costs are much lower and is why it has a huge operating margin of 65%, so profits look safe. The online share dealing platform is very highly regarded and even though costs are slightly higher than the competition, myself among many others still choose it.
The retail investment market looks set to continue to grow as people are realising its potential and Hargreaves Lansdown offers the best platform for the general public. It already has excellent client growth and this should continue as long as it keeps up its good reputation and customer service record.
Also unlike other finance institutions such as Barclays (LSE: BARC), Hargreaves Lansdown pays only a modest dividend of 2.6%. This is justified as it has an enormous return on reinvested capital of over 70%. Barclays only has a return on reinvested capital of 0.3% so Barclays will take a drastically longer period of time to see a profit from reinvested capital, and therefore better serves its shareholders by paying earnings as dividends. Hargreaves Lansdown is one of the biggest holdings for Nick Train who is one of Britain’s most respected fund managers and is obviously willing to pay more for quality.
This stock isn’t for everyone because of its high valuation but if you appreciate the quality of a company rather than just the price then Hargreaves Lansdown should be at the top of your list. With such a high operating margin, ROCE and double digit growth there are several advantages that makes me think its premium is justified.
Robert Faulkner owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.