Among the rallies in stocks due to positive vaccine news, the rise in HSBC (LSE: HSBA) shares has been among those making the biggest impact. HSBC shares are fairly widely held, so many investors have benefited from the rally.
And after the surge, these investors could be feeling a little better about their portfolios. Thanks to a 27% rally over the last month (with much of it due to the vaccine candidate data), shares of HSBC are around 50% higher than their September lows.
But despite them no longer being as great a bargain as they were in late September, I still believe HSBC shares remain a Covid-19 rebound play. And I’d still buy and hold the stock at current prices.
HSBC shares: I like the valuation
One reason I like HSBC shares still is that the bank’s price-to-book value (P/B) ratio remains fairly low versus where it was before the pandemic.
At the time of writing HSBC’s have a P/B of around 0.57, versus the P/B of around 0.877 at the end of last year. I don’t think it will stay this low for long.
I feel it could rise because the bank’s normalised earnings will likely grow as the world economy returns to business as usual. I also reckon those normalised earnings could grow as management proceeds with its cost restructuring plans.
If earnings grow in the way I expect in the coming years, the market could have more confidence in the assets that the bank uses to generate its earnings. If the market has more confidence, investors could award the bank a higher P/B.
Second, I feel HSBC’s P/B could rise given that the US election is now over and with the new potential for US China relations to improve.
If relations between the two countries do improve, the market could potentially price less risk into HSBC shares. Greater China is a hugely important market for and it makes most of its profits in that region.
I also see HSBC as a Covid-19 recovery play due to what management might do with the dividend over the next few years. The company could pay a dividend again next year as regulators become less concerned about Covid-19. In fact, there is even potential for the bank to pay a limited dividend this year based on management’s third-quarter commentary.
That probably will not be anywhere close to the pre-pandemic dividend, but the payout could have the potential to rebound close to pre-pandemic levels over the next few years as its earnings normalise. That would boost the share price too in my view.
Given the bank’s valuation and what I think management might do with the dividend over the next few years, I’d buy HSBC shares at these prices and hold for the long term.
Jay Yao 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.