Avoiding losses is one of the key lessons many investors will recognise as being a sage piece of advice from legendary investor Warren Buffett. That’s why I think all investors should run a mile from this company – despite the falling share price.
Looking hapless
According to Shortdata, four financial organisations, including the London-based hedge fund Odey Asset Management, have short positions against Metro Bank (LSE: MTRO). This is an ominous sign for investors because these professionals expect the share price to fall. Given Metro Bank’s history of problems, and current turmoil at the top, who would really say they’re not likely to be proven right?
Things have been going downhill at the bank ever since controversies arose in 2018 over payments to the chair’s wife for architectural services. Since then, the company has faced issues with dwindling capital reserves, a £900m accounting error, a subsequent share placing, customers queuing to take money out of the bank, and now the chair is leaving his position.
It has been a cacophony of disasters for the bank, and it only joined the stock market in 2016. Back then it was valued at around £1.6bn. It’s now valued at less than £500m.
All these problems make the bank look hapless. Even worse, they make it look very likely, in my opinion, that the bank will keep on destroying the value of its shareholders’ investment. This is why I’d avoid the shares at all cost.
A better bank
The share price of global bank HSBC (LSE: HSBA) hasn’t been shooting the lights out, as it’s down 2.5% during 2019 so far. Unlike its peer, however, it has several long-term factors in its favour, I think.
One is scale. It has 40m customers, and operates in 65 countries and territories. At the end of 2018, it held $2.6tn in total assets. I think the struggles of the challenger banks – several have consolidated in recent years – have been highlighting the importance of scale in banking.
HSBC operates in some high-growth markets, especially in China. Asia accounts for around 80% of profit for the bank but it also has exposure to the Middle East and Latin America.
The bank also benefits from not focusing overly on just consumers or investment banking. Revenues are split between retail banking and wealth management, commercial banking, global banking and markets, and, by far the smallest branch, global private banking.
The last set of results from the bank underlined the case for investing. Operating income rose 5.1% to $27.4bn in the first half of this year, with underlying profits before tax jumping by 6.8% to $12.5bn.
With a dividend yield that is higher than the FTSE 100 average, at above 6%, and with shares not looking that expensive – the price-to-earnings is around 12 – I like the potential for income and share price growth that the bank provides.