Are big banking stocks cheap for a reason? More than five years after the financial crisis, banking shares continue to fall and have failed to win back the confidence of investors.
An alternative way to gain exposure to the financial sector is with pick and shovel stocks. These are companies thatprovide the tools and platforms necessary for investors to access financial markets. One of the biggest and most successful in the UK is Hargreaves Lansdown (LSE: HL).
Hargreaves shares fell by around 4% after the firm published its interim results today, but the firms stock is still worth 20% more than it was 12months ago. I believe Hargreaves could still have a lot to offer investors.
To highlight the contrast between Hargreaves performance and that of big banks, Ill also take a look at HSBC Holdings (LSE: HSBA). Will the UKs largest bank make money for patient investors, or could it remain a value trap for years to come?
Hargreaves results showed that it can still attract new customers in falling markets. The firm signed up 47,000 new customers during the last six months of 2015, compared to 23,000 during the same period the previous year. Net new business inflows for the period were 2.8bn, up from 2.25bn previously.
The influx of new business means that despite a 3.5% fall in the FTSE All-Share, the value of Hargreaves assets under management (AUM) rose by 7% to a record high of 58.8bn at the end of 2015. Pre-tax profits rose by 6% to 108m for the half year, while the interim dividend was increased by 7% to 7.8p.
After last years dip in profits, Hargreaves appears to have returned to growth. This has been achieved without sacrificing the firms incredible profit margins. Hargreaves reported an operating margin of 67.9% for the first half of its current financial year. This is down slightly from 70.7% last year, but in line with last years full-year figure of 67.3%.
Hargreaves share price has risen by 130% over the last five years. As youd expect, this stock isnt cheap and currently trades on a 2015/16 forecast P/E of 34. However, the dividend yield is still quite attractive. The shares are expected to yield 2.7% this year, rising to 3.0% in 2016/17.
HSBC: does size matter?
With a market value of 92bn and expected profits of $15.5bn for 2015, HSBC dwarfs Hargreaves.
Size is no guarantee of positive returns, however. HSBC has delivered an average annual total return of -2.6% per year over the last five years. Bycontrast, Hargreaves has managed a stunning average total return of 22.5% per year over the same period.
Im not sure that theres any evidence that the tide is turning for HSBC. The latest analyst forecasts suggest that HSBCs earnings per share may fall by 3.4% this year. The dividend is expected to remain flat, at $0.51 per share.
HSBC only seems to have two attractions. The stock looks cheap, on 8.7 times forecast earnings, and offers a huge 7.5% dividend yield, which looks pretty safe to me. For pure income investors or value buyers with a long timeframe, Id back HSBC.
However, if youre looking for a decent total return with real growth potential, then Hargreaves could be a better buy than HSBC.
It may also be worth looking outside the financial sector for growth and income buys.
One potentially outstanding opportunity is this company, which the Motley Fool’s investment advisers have believe could triple in size over the next few years.
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Roland Head owns shares of HSBC Holdings. The Motley Fool UK has recommended Hargreaves Lansdown and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.