After the Brexit vote, European banks were hammered. American banks held up comparatively well as the prevailing wisdom is that large American banks are fairly insulated from European banks.
One good way to generate high risk-adjusted returns is to find anomalies that run counter to the prevailing wisdom. One such anomaly is a blue-chip European bank HSBC
HSBC, +1.88%
in U. K. that has performed not only better than European banks, but has also outperformed American banks.
The charts
Let us start by looking at two charts. The first chart is a long-term annotated chart of HSBC that shows buy, target and support zones.
Please click here for the long-term annotated chart of HSBC.
The second chart is for a one-month period that includes the Brexit and compares HSBC with three large American banks, Bank of America
BAC, +0.98%
Citigroup
C, +0.27%
and JPMorgan
JPM, +0.11%
as well as to three large European banks, Barclays
BCS, +1.39%
Deutsche Bank
DB, +2.07%
and Banco Santander
SAN, +1.45%
Please click here for the chart comparing HSBC to large American and European banks.
The chart shows that HSBC has outperformed both its American and European peers. Over the last month, HSBC is up 5.67%. In contrast, the darling of American banking, JPMorgan is up only 3.77% in spite of reporting earnings during this period that beat not only the consensus number, but also the higher whisper number. During this period, HSBC has also outperformed Barclays, a British bank with large international operations, by 17.64%.
Understanding outperformance
To understand the outperformance by HSBC, let us take a look at its financials, which are fairly complicated The easiest way to understand them is to look at reconciliation of reported results to adjusted performance by geographic regions.
Please click here for a table of HSBC reconciliation of financials.
Here are the key observations from the financials of HSBC.
Profits: 81% are coming from sources outside Europe.
Revenue: 72% is from outside Europe.
The foregoing means that if Europe improves, profits can take a dramatic jump.
Hong Kong accounted for 38% of profits.
The foregoing means that if China improves, profits can jump dramatically.
The bank is well diversified across the globe.
When, where and how to buy
The Arora Report highlighted HSBC in the column “Post-Brexit opportunities in three British stocks.” As of this writing, HSBC has gained 11.57% from the Brexit low.
Our philosophy at The Arora Report is to be disciplined and patient and, when appropriate, to buy at or near bottom of a support zone. The chart shows the support zone. There is no guarantee that HSBC will pull back to support zone, but according to our algorithms, there is better than 65% probability of a pullback to the support zone. Aggressive investors may consider starting a very, very small scale in right here, but conservative investors may want to wait to start a scale in at or near support.
The big accumulation should take place if there is bad news that does not adversely affect long-term fundamentals and the stock dips into the buy zone shown on the chart. Of course, we will do a careful review of fundamentals if and when HSBC drops into the buy zone. Buying good companies on a temporary disappointment is an evergreen strategy that we have profitably employed across hundreds of stocks over the decades. Please click here for a successful example of this strategy on Walgreen
WBA, +0.36%
The key is to be prepared in advance just like we are now doing for HSBC.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article and/or may take positions in stocks described in this article any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is a distinguished master of the financial markets, an engineer and nuclear physicist by background, has founded two Inc. 500 fastest growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com
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