When it comes to Brexit, who knows what will happen? At the moment, most people seem to think the UK’s exit from the EU will be without a deal. Of course, that could all change soon.
I think investors should still be following Warren Buffett’s advice of buying good companies at a fair valuation. I’ve been hunting for these types of stocks, but at the moment I think the market is overvalued.
Does that mean I think would-be investors should sit on their cash? No, not necessarily. I believe there are still good buying opportunities out there, but generally the price of stocks is a little higher — and therefore, the margin of safety a little smaller — than I would like to see. I still feel these two companies could represent a good buying opportunity, albeit at a slightly expensive price.
Shares in Unilever (LSE: ULVR) will probably never be cheap. Currently the shares are trading with a trailing price-to-earnings ratio of around 20. But with the company being the home of household brands such as Marmite, Dove and Persil, I believe the business is well-protected from rival firms. A no-deal Brexit could see the price of Unilever’s products increase. However, I think brand loyalty runs deep with the incredible list of products in its portfolio, and I have faith that customers will refrain from shopping around for cheaper alternatives.
With the dividend yield at less than 3%, potential investors may be nervous about future returns from the company. The business’s success comes from its growth. Over the past five years, Unilever’s share price has increased by just over 90%, providing incredible results for shareholders. Returns get even more impressive the further back you look. If you were lucky enough to have bought shares in the company in 2009, you would have seen an increase of approximately 220%.
An unloved bank
My next pick tells a slightly different story. HSBC (LSE: HSBA) is unloved amongst investors at the moment. Some commentators have pointed the finger at Brexit and the US-China trade war. The bank’s stock has disappointingly under-performed the FTSE 100 by several percentage points. OVER WHAT PERIOD? ALWAYS SPECIFY
I think the main cause of the price slump is the protests affecting Hong Kong. This is by far the bank’s largest market, and with fears that the local economy could plunge into recession, I can understand why some investors are feeling anxious.
Ever the contrarian, I believe this leaves the HSBC share price undervalued. As part of its plan to diversify from the Chinese and Hong Kong markets, the bank has announced plans to re-allocate £35bn of capital into the UK’s mortgage market.
It is trading at a price-to-earnings ratio of 11 and has a dividend yield of 6%. Added to this, in the interim results, the group reported a profit-after-tax increase of 18.1%. The bank has also announced a $1billion stock buyback, which is due to commence soon.
Despite believing that the market is overvalued generally, I feel that buying opportunities are still out there.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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 2019