After another rollercoaster start to the week, I would like to discuss three financial stocks that are likely to experience more volatility. Financial firms are sensitive to interest rate changes with the general view that they mostly benefit from rising interest rates. However, the recent months have not been good for these three financial stocks. Could it be that the markets are pricing a slowing down of the U.S. and global economies?
Two of the global stocks in the article are U.S.-based and one of them is U.K.-based. Although many financial stocks, as well as many British American Depositary Receipts (ADRs) listed in U.S. exchanges, are cheaper than they were several months ago, I do not think the choppiness in individual share prices is over.
Therefore, until we have further clarity about the fundamentals of the economy and the reality of global instability and political risks, I suggest that you wait to hit the buy button on American Express (NYSE:AXP), Bank of America (NYSE:BAC) and HSBC Holdings (ADR) (NYSE:HSBC).
American Express (AXP)
American Express is one of the largest global payment networks. On the positive side, according to the earnings release in October 2018, AMEX’s recent net revenue growth has been approaching double digits — a significant improvement from the 4-5% achieved in the past decade.
Management is also working to increase the use of AMEX cards both in the U.S. and globally. For example, in October 2018, the company and Amazon (NASDAQ:AMZN) joined forces to offer co-branded credit cards to small U.S. businesses. Furthermore, as the company’s core consumers form an affluent client base relative to the customers of competitors, American Express — a trusted brand — may be less affected from a potential economic slowdown. As a result of the positive factors, year-to-date, AXP stock is up 7%.
However, the financials give AXP stock investors pause for concern. American Express is not cheap relative to financials: its price-to-earnings (P/E) ratio is over 25%. Investors are beginning to worry if earnings will keep up with this rich valuation.
The company’s dividend yield of 1.4% is much less than most other financial stocks — possibly not enough to lure new investors to AXP stock as a dividend play. As the financial industry is transforming itself amid the discourse of the fintech revolution and innovation, American Express faces serious competition to increase its customer base — the main driver of future growth.
Furthermore, for investors who pay attention to technical charts, there are not many positive long-term catalysts for American Express stock. The $100 level is psychologically important and the next few weeks will show if AXP will “bounce” off this level or break through it.
Bank of America (BAC)
2018 has been a difficult year for most banks and financial stocks in general. Year-to-date, BAC stock is down over 18%. The uncertainty regarding the U.S. interest rate environment as well as the possibility of an inverted yield curve are not conducive for BAC stock’s success.
The bank’s recent financial position has not helped the Bank of America stock price, either. For starters, total revenues have been basically flat since 2014, partly due to the costs of acquiring Merrill Lynch and Countrywide. The management has initiated a series of cost-cutting measures to improve the bottom line, yet analysts do not entirely agree on how far these measures will go to improve the balance sheet. They are also concerned about how interest expenses will affect its earnings growth.
Investors tend to punish companies, like BofA, that do not grow fast enough. After investors’ harsh response to the uncertainty in the markets, BAC stock has suffered from a damaging technical picture. For those investors who pay attention to moving averages and oscillators, its short-term technical chart still looks rather weak, pointing to more price volatility in BAC stock.
However, in the longer-term, it is not all dark and gloom for Bank of America. In June 2018, the bank announced its capital plan. Accordingly, by mid-2019, the bank will buy back about $20 billion worth of its common shares. As of Q3 2018, the bank also increased its quarterly common stock dividend by 25% to 15 cents per share. The current dividend yield for BAC stock stands at 2.3%.
Source: Gyver Chang via Flickr (Modified)
In late October, HSBC delivered a robust set of earnings results. Analysts have welcomed the return to growth as the bank has lately been going through restructuring to increase efficiency following years of stagnation. The bank’s strong capital position ensures that the current dividend yield of over 6% for HSBC stock will continue in the future too.
Value investors are encouraged by the bank’s P/E ratio, which is currently at 13.5. Similarly, its price-to-book (P/B) ratio of 0.8, which measures the market value of HSBC’s equity to the book value of its equity, makes the shares attractive. In general, when comparing similar financial stocks, investors like to see lower P/E and P/B ratios.
Despite the growth in both the top- and bottom-numbers, investing in HSBC comes with global risks. Year-to-date, the company is down over 18%. The London-based bank’s operations are global, about three-quarters of its profit comes from mostly corporate clients in Asia; therefore, offering exposure to Hong Kong and China.
As such, the volatility in Chinese stocks due to U.S.-China trade war fears as well as the political reality in Britain both affect the HSBC stock price. Following a June 2016 referendum, the U.K. decided to leave the European Union (E.U.). The process, known as “Brexit,” has been complicated both in technical and political terms. On Dec. 10, Theresa May, U.K.’s Prime Minister canceled a parliamentary vote on the government’s proposed Brexit deal. She said that as the government would have lost the vote, she would delay it to seek further assurances from the European Union. If she can sweeten the deal, PM May might pursue the vote again in early 2019. Now, the country faces more uncertainty and that would negatively affect the British shares, the pound and possibly HSBC stock.
Over the long term, HSBC stock remains a strong financial stock with an excellent dividend ratio and exposure to the high-growth markets of the Pacific Rim. However, despite the recent selloff, it might still be too early to go long HSBC shares.
The Bottom Line on These Financial Stocks
Source: Sean MacEntee via Flickr
Markets suffer during times of uncertainty, and the current environment in the U.S., the U.K. offer plenty of question. Until we have more clarity on the state of the U.S. economy as well as global worries on trade concerns and Brexit, I would avoid committing too much capital in these three cyclical stocks.
Nonetheless, long-term investors with a three-to-five year horizon may regard any further dip in the price of these financial stocks to be an opportunity to get long.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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