To make money in the stock market, investors must buy a stock at a low price, and later sell it at a higher price. Moreover, it’s important that investors focus on well-established companies that can sustain their profitability over the long term. In other words, we are looking for blue-chip companies that are trading at an attractive valuation.
But what is an attractive valuation? Personally, there is no clear-cut answer to this since investors should look at it from various aspects. Still, you can start with one simple yet insightful approach, which is to compare the company’s valuation to the SPDR STI ETF (SGX: ES3). For those who are new to this, the SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI).
The idea is to find blue chips that are trading at a valuation lower than the SPDR STI ETF. Here, we will focus on the price-to-book (PB) ratio and price-to-earnings (PE) ratio as our valuation metrics. With that, let’s look at two blue chips that meet the above requirement.
Blue Chip 1
The first company on our list is United Overseas Bank Ltd (SGX: U11), or UOB, one of the three major banks based out of Singapore.
Overall, UOB’s shares are trading at an attractive valuation compared to the benchmark. At its current price of S$24.4 (as of the time of writing), its PB and PE ratios are 1.0 and 10.3, respectively. Comparatively, the SPDR STI ETF’s PB and PE ratios are 1.0 and 11.3, respectively.
UOB’s attractive valuation becomes even more compelling if investors consider its recent financial performance. Here are some numbers. UOB’s total income grew 9% year-on-year to S$2.4 billion while net profit improved 8% year-on-year. Clearly, it’s a stock that worth a closer look given its attractive valuation, as well as strong performance recently.
Blue Chip 2
Hongkong Land Holdings Limited (SGX: H78) is the second company on my list. As a quick introduction, Hongkong Land is mainly involved in the property development, investment, and management business. Its property businesses are spread across China, Southeast Asia and in its home base of Hong Kong.
Overall, Hongkong Land’s valuation is even more compelling than that of UOB. At its current price of $6.8 (as of the time of writing), it’s PB and PE ratios are 0.4 and 6.5, respectively. This compares favorably to the SPDR STI ETF’s PB and PE ratios of 1.0 and 11.3, respectively.
Also, over the past decade Hongkong Land’s shares have traded at PB multiples roughly between 0.4 to 1.0 times. The idea here is simple. If the valuation doubles from here – 0.40 times to 0.80 times, Hongkong Land’s share price will double from here as well, assuming that there is no contraction in the per share book value. All in all, this is a potential low-risk bet for conservative investors.
Though these two companies generally have stable business operations, it’s important that investors do not take past performance as a guarantee of future performance. After all, businesses do change and these companies are not shielded from such changes. Thus, it is always important that investors assess the future prospects of these companies before investing in them but the attractive valuations of both UOB and Hongkong Land do make them compelling longer-term investments for those who have patience.
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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned. Motley Fool Singapore has recommended the shares of United Overseas Bank Ltd and Hongkong Land Holdings.