These 2 Blue Chip Stocks May Be Genuine Bargains

Yesterday, the Straits Times Index (SGX: ^STI), Singapore’s stock market benchmark, closed at 3,092 points. This represents a 12.9% decline from the index’s 52-week high of 3,550 that was reached just four months ago on 16 April.

The double-digit fall thus far may lead investors to see it as a prompt to start searching for bargains among the 30 blue chips that make up the index. But, a stock need not be a bargain just because it has fallen in price – a focus on its price in relation to the value of its business is still needed.

Keeping this in mind, the following are two blue chips which are indeed carrying low valuations.

Cheap stock No.1

The banking outfit, Oversea-Chinese Banking Corp Limited (SGX: O39), which prides itself as the longest established bank in Singapore, closed at S$9.68 yesterday. At that price, OCBC’s valued at just 1.19 times its latest book value.

Chart 1 - OCBC's PB ratio from start of 2010 to 13 August 2015

Source: S&P Capital IQ

The price-to-book (PB) ratio, which is calculated by dividing a firm’s share price by its book value (total assets minus total liabilities), serves as a good rule-of-thumb when it comes to valuing financial institutions like a bank.

As you can see in the chart above, OCBC’s current PB ratio is near the lowest it’s ever been over the past five-plus years since the start of 2010. In fact, the figure of 1.19 is triumphed only by the 1.17 that was seen on just Wednesday.

OCBC’s low valuation at the moment helps set the stage for a possible mean-reversion to occur; in investing, a positive mean-reversion is the phenomenon of how below-average valuations often result in above-average outcomes.

Cheap stock No.2

OCBC’s fellow Singapore-based banking giant United Overseas Bank Ltd  (SGX: U11) has a very similar valuation-dynamic.

Chart 2 - UOB's PB ratio from start of 2010 to 13 August 2015

Source: S&P Capital IQ

UOB has a PB ratio of 1.07 based on its latest book value and closing price of S$20.35 yesterday. That valuation figure is also the bank’s second lowest since the start of 2010 with the lowest PB ratio of 1.05 occurring on Wednesday, just like with OCBC.

A Fool’s take

The two banks mentioned above have compelling valuations now. But, it’s worth noting that them having historically-low valuations alone is not sufficient to build an investment case. A deeper look into their future prospects is still needed as cheap stocks can still result in painful losses if their businesses deteriorate in the future.

Interested to talk stocks or chat about bargain hunting? Come meet David Kuo and the rest of the Fool Singapore team on August 15! 

Please join us at Invest FAIR Singapore on 15 August. (Suntec Centre, Booth B-16). Come chat with us at our booth, and see our MAS-licensed Director, David Kuo, give his official SGX investor presentation.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.