When it comes to investing in shares, the aim of the vast majority of people is to buy low and sell high. Clearly, doing this in practice is far more difficult than in theory, simply because emotion often gets in the way and means that many of us are too slow to buy when stocks are cheap, and too slow to sell when they become rather less so.
A Challenging Period
A prominent example of a sector that offers stocks with low share prices is the banking sector. Thats because it has experienced a number of difficult years, with the financial crisis causing the profitability of UK-focused banks such as RBS (LSE: RBS) (NYSE: RBS.US) to disappear, while in recent years a slowdown in Asia has meant that the likes of HSBC (LSE: HSBA) (NYSE: HSBC.US) and Standard Chartered (LSE: STAN) have seen their profits come under pressure, too.
In addition, all three banks have been fined by regulators for a variety of wrongdoing. For example, RBS and HSBC were among six major banks fined a total of 2.6 billion for rigging the forex market just a few months ago, while Standard Chartered was fined 300 million in 2014 for compliance lapses.
Valuations
The effect of such a period on the valuations of the three banks has been major, with them now trading on extremely low (and attractive) multiples. For example, RBS has a price to book (P/B) ratio of just 0.75, while HSBC and Standard Chartered have price to earnings (P/E) ratios of just 10.1 and 8.4 respectively.
Certainly, they have experienced a very difficult period, with investor sentiment understandably being hit hard. However, their current valuations appear to offer significant margins of safety so that even if more fines and more pressure on profitability lie ahead, their share prices may not be hit all that hard.
Looking Ahead
With China cutting its interest rate and being rumoured to be considering a stimulus package to boost its economic performance, the outlook for Asia-focused banks such as HSBC and Standard Chartered appears to be relatively bright. For example, the two banks are forecast to increase their respective bottom lines by 6% and 7% in the current year, which is roughly in-line with the growth rate of the wider index.
Meanwhile, UK-focused RBS is expected to report a return to profitability when it releases its full year results for 2014, which would be the first time since the start of the credit crunch that its bottom line is in the black.
So, while there could be more lumps and bumps ahead for all three banks, their current share prices seem to fully reflect and price in such problems. As a result, they seem to offer excellent long term growth potential and, due to their bargain basement status, RBS, HSBC and Standard Chartered could deliver stunning profits for their shareholders.
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Peter Stephens owns shares of HSBC Holdings and Royal Bank of Scotland Group. The Motley Fool UK has recommended 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.
