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Cheap shares: I’d buy this FTSE 100 stock now for a big recovery in 2021!

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October has left memorable scars in stock-market history, having been the month of the spectacular crashes of 1929, 1987, 2001 and 2008. Yet there’s nothing particularly special about this month, other than it appears late in the year, when investor fatigue sometimes sets in. Alas, this October has not been a good one for stocks on both sides of the Atlantic. The US S&P 500 has lost almost 100 points (2.8%), while the FTSE 100 has fared even worse, diving nearly 290 points (4.9%). Nevertheless, for value investors and those who like to ‘buy the dip’, this feels like an opportunity to drip-feed yet more cash into cheap shares.

Falling markets produce cheap shares

While it’s not been a great month for the FTSE 100, it’s been a terrible year for the UK’s main index. By Halloween, the Footsie had lost 1,965 points (26.1%), down more than a quarter this calendar year. That’s one of the worst performances in the index’s 36-year existence — and 2020’s not even over. However, the more the index falls, the more mispriced some company stocks become, pushing them deeper into the ‘cheap shares’ bin.

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Over the past year, many FTSE 100 stocks have become ‘fallen angels’ as their share prices collapse into the bargain bucket. Of the 100 member companies of the FTSE 100, 64 have seen their shares decline over the past 12 months. This group of fallers includes 34 shares with falls of between 25% and 72% in 12 months. For me, this broad FTSE 100 ‘drop zone’ offers rich pickings for value investors hunting cheap shares.

HSBC shares suffer a terrible 2020

Among the shares propping up the bottom of the FTSE 100 performance table is HSBC Holdings (LSE: HSBA). Being one of the world’s biggest lenders has been painful for the bank in 2020, with its shares almost halving (down 44.8%) over 12 months. This puts the global mega-bank at #12 in the FTSE 100’s biggest fallers over the past year. HSBC’s stock is also down 49% over two years, 56% over three years and 36.7% over five years. But are these a value trap or genuinely cheap shares?

I see HSBC rebounding in 2021

Obviously, being hugely exposed to personal and business lending is hardly ideal during the worst global pandemic in a century. Indeed, it’s likely that HSBC will have to put aside many billions of dollars to cover expected loan losses. But third-quarter credit impairments of $785m were considerably below analyst forecasts of $2bn. Likewise, HSBC’s huge operations in Asia actually produced pre-tax profits of $3.2bn in the third quarter. In addition, HSBC’s Common Equity Tier 1 (CET1) ratio — an important measure of financial strength — actually climbed to 15.6% by end-September. So why are these cheap shares so lowly rated?

Of course, it’s not all plain sailing for HSBC. Ultra-low interest rates worldwide have affected its net interest margin (the spread the bank makes between lending and savings rates). Also, it’s right in the firing line of deteriorating US-China relations. Despite this, the bank has indicated that it is keen to restart cash dividends with a ‘conservative’ payout for 2020. That hardly sounds like a bank on the brink, which is why I believe HSBC’s stock has been unfairly dumped into the ‘cheap shares’ category.

In short, I would buy these cheap shares today, ideally inside a tax-free ISA, so as to enjoy a rebound in the share price and the resumption of quarterly cash dividends in 2021!

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Cliffdarcy has no position in any of the shares mentioned. 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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