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The HSBC share price: why I think the stock could be worth buying

Rupert Hargreaves
·3-min read
Scene depicting the City of London, home of the FTSE 100
Scene depicting the City of London, home of the FTSE 100

The HSBC (LSE: HSBA) share price has been a pretty terrible investment over the past year.

Ever since regulators asked bank groups to suspend their dividends at the beginning of the coronavirus crisis, the stock has slowly drifted lower as investors have moved on.

After these declines, shares in the lender are now changing hands at one of their lowest levels in recent history. In fact, you have to go back to the mid-90s to find a lower price.

As such, I think it could be worth buying the HSBC share price at current levels. Even though the banking group is facing some severe headwinds, which could hold back growth in the short and medium term, I think its current valuation undervalues the lender’s long term potential. Today I’m going to explain why.

HSBC share price bargain

As I noted above, shares in HSBC have slumped this year. After this decline, the stock is changing hands at a price-to-book (P/B) ratio of just 0.5. This seems entirely unwarranted.

Technically, a stock deserves to trade at a discount to book value if the business is losing money. If a company is losing money, it is eroding shareholder value, which means book value will decrease over the long term.

However, HSBC is not losing money. Analysts expect the banking giant to report a net profit of nearly $5bn this year. Net income could hit $9bn in 2021, according to similar forecasts.

Based on these projections, the HSBC share price is not only cheap on a P/B basis. Its forward price-to-earnings (P/E) multiple of 8.8 also looks cheap.

Then there is the company’s dividend potential. If the bank restores its dividend at 2019’s level, the stock could offer a dividend of nearly 7%.

Risks ahead

All of the above indicates that HSBC is cheap at current levels. But this is only part of the story. It is facing some significant headwinds, which include low interest rates around the world, increasing regulatory scrutiny, and the trade war between the United States and China.

The bank risks getting caught between these two superpowers as it relies on its Hong Kong business for the majority of underlying profit. Moreover, without a US presence, HSBC could lose the international footprint that acts at its most significant competitive advantage.

I believe these risks are more than accounted for in the current valuation. That’s why I think the HSBC share price could be worth buying at current levels. Investors are already anticipating the worst, which suggests that even a slight improvement in the outlook could lead to a significant increase in the stock price.

The best way to take advantage of this may be to own the stock as part of a diversified portfolio. This would provide the best of both worlds. Investors could profit from any upside while minimising downside risk if the stock continues to fall.

The post The HSBC share price: why I think the stock could be worth buying appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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.

Motley Fool UK 2020