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The HSBC share price has dropped like a stone in 2018. Here’s why I’d buy it today

This year hasn’t been a successful one for investors in HSBC (LSE: HSBA). The global bank’s share price has fallen by 15% since the start of the year. During that time, it’s shown little sign of mounting a sustained comeback, with its stock price seemingly on a downward trend.

The performance from a business perspective, though, appears to be relatively sound. It now offers a wide margin of safety, which could suggest that there’s a buying opportunity on offer. However, not all stocks which have experienced declines of late may offer the same level of appeal, as highlighted by a company which released an investor update on Tuesday.

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High valuation

That stock in question is accident management, incident management and legal services specialist Redde (LSE: REDD). The positive start to its financial year, reported in its recent AGM statement, has continued into December. Sales are showing an increase over the same period last year and reflect continued growth in trading volumes. As a result, trading profits are also ahead of the prior year.

While the company’s performance in its financial year-to-date has been positive, it’s expected to report a rise of just 1% in earnings in the current year. This suggests it may lack a clear catalyst to allow its share price to recover following its decline of 14% in the last three months.

Even after its recent drop, Redde doesn’t seem to offer a wide margin of safety. For example, it has a price-to-earnings (P/E) ratio of 12.4, which suggests it may be fully valued, given its modest growth outlook. At a time when other stocks offer wider margins of safety following recent falls, it may be a company to avoid.

Improving outlook

In contrast, HSBC could offer strong recovery potential after a challenging period. The bank is expected to post a rise in net profit of around 5% in the next financial year, with investment in its growth strategy set to pay off.

Despite its improving financial outlook, it has a P/E ratio of around 11.4, which suggests that it may be cheap relative to some of its FTSE 100 peers. And since it has a dividend yield of 6.1%, from a payout that is covered 1.4 times by profit, its income potential appears to be high relative to the large-cap index.

Of course, HSBC faces a number of risks. The prospects for the global economy are uncertain at present. There’s a danger that a full-scale trade war will come into effect in 2019, with relations between China and the US poor following a number of tariffs placed on various goods and services. This could reduce investor expectations when it comes to the GDP growth prospects for a variety of countries and regions.

However, in the long run, the bank’s low valuation, high yield and diverse presence across the global economy could allow it to generate improving total returns, in my opinion.

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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. 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.

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