Shares in HSBC Holdings (LSE: HSBA) have risen by 8% this week, increasing the value of the UK’s biggest bank by around £6.6bn.
The shares jumped higher on Wednesday, after the latest Chinese economic data suggested that efforts to stabilise its giant economy might be succeeding. The news was certainly welcome for HSBC shareholders, whose stock has fallen by nearly 30% over the last year.
Unfortunately, broker forecasts for HSBC’s 2016 earnings have fallen by a similar amount. This leaves us with an uncertain picture of the bank’s near-term profit potential. However, I continue to believe that HSBC is an excellent long-term income play.
I’m reassured that the current forecast yield of 7.8% is still covered by 1.3 times by forecast earnings. Although I would like to see a higher level of cover, this suggests to me that the dividend will stay safe. If HSBC’s earnings outlook also improves, I believe the shares could continue to rise.
A better alternative?
I rate HSBC as an income buy, but I believe that the bank’s giant £89bn market cap means that its growth potential is limited by its sheer size.
If you’re looking for genuine growth stocks then focusing on smaller companies may be more profitable. One possible option is hedge fund firm Man Group (LSE: EMG). Man Group’s shares rose by 5% this morning after the firm said that it attracted new business during the first quarter, despite “challenging” market conditions.
What interested me most in this morning’s update was that the firm’s algorithmic trading division, AHL, delivered investment gains during the first quarter. Poor results from AHL have been one of the main reasons for the firm’s slump in earnings over the last few years. Improved results from AHL could help drive stronger earnings growth at Man.
Man shares currently trade on a forecast P/E of 11 and offer a potential yield of 4.3%. Further gains may be possible, in my view.
Disappointment could trigger sell off
Carpet manufacturer and distributor Victoria (LSE: VCP) fell by more than 5% this morning. The group said it had abandoned its attempt to acquire Lano Carpets, a European manufacturer. Victoria shares have risen by 377% over the last two years. Much of this explosive rise has been driven by the firm’s acquisitions. Unfortunately it now looks as though this run may be coming to an end.
If Victoria’s growth slows, the firm’s stock could start to look quite pricey. The shares currently trades on a 2016 forecast P/E of 20, falling to a projected P/E of 15 for 2017. However, there’s no dividend and the firm’s repeated acquisitions have pushed net debt up from just £1.5m in 2014 to £81.1m today. This is six times the firm’s forecast 2016 profit of £13.1m, which seems quite high to me.
Victoria may find more acquisitions and continue to deliver strong growth. But in my view there is a definite risk that the shares have now peaked and could continue to fall. I’d certainly consider taking some profits after such a strong run.