By Horacio Marquez
Contributing Editor
Money Morning

In tough times, the strong get stronger, and HSBC Holdings PLC is (NYSE ADR: HBC) is cherry-picking the world.

HSBC is one of my favorite banks in the world. And that feeling is shared. In fact, “the world’s local bank,” as they like to call themselves, is the largest recipient of deposits in the world. HSBC operates in 86 countries around the world and has 55% of its assets in Europe, 23% in Asia/Pacific, including its original base in Hong Kong, 26% in North America and 4% in Latin America.

This diversification is invaluable in an increasingly globalized world. Additionally, it spreads out all of the risks to which a bank is exposed: systemic, economic, regulatory, currency, deposit-raising and lending.

Geographic diversification, a strong balance sheet and disciplined credit saved HSBC in the downturn.

There’s an old adage in banking that I learned when I joined a venerable U.S. financial institution at the beginning of my career. It goes: “Any fool can make a loan, but collecting it is not that easy.”

The point is, having the largest amount of deposits really counts. A solid deposit base, a strong balance sheet and a “boring” long-term strategy are precisely what a bank should have.

Key dimensions used to analyze banks show how fast and healthily HSBC’s loan portfolio is growing. But the really impressive growth is coming in the bank’s ratio of deposits to loans. You don’t want to see exploding growth in loans, because it almost always leads to bad loans down the line.

What you really want to see is a bank that has its own funding – a bank that doesn’t depend on credit markets.

Banks I call “money junkies” crash when credit markets seize up. We saw this happen to many financial institutions last year when the inter-bank markets froze.

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I’ve analyzed emerging markets for almost 30 years, and I can tell you that one recurring theme is fragile economies blowing up through their banking systems. The banking system acts like the proverbial canary in the coalmine. And when these economic blow-ups occur, weak banks disappear and their best assets are snatched up by the best capitalized and most-liquid banks at rock-bottom prices.

Because of its unequalled strength in deposit gathering, HSBC has an enviable ratio of about 120% of deposits to assets. In fact, a study I did back in 2001, led me to the conclusion that HSBC would be one of the few banks flooded with billions of dollars in corporate cash if a global financial debacle should occur.

You see, good banks lend money to those who do not need it. And cautious depositors should deposit in banks that are flush with deposits in times of crisis.

HSBC Weathers Downturn, Retools for Recovery

To be sure, HSBC did take its share of lumps in this downturn. The bank grew fairly aggressively prior to the economic collapse, because of a global synchronic growth episode, which prompted enormous demand for loan growth around the world for at least five years.

It was also hampered by its acquisition acquisition of Household Finance Corportation, the assets of which are being wound down.

But, given the company’s traditional credit discipline, its share of trouble was relatively small compared to what the competition suffered through. And in the end, the bank’s strong capitalization, global diversification and discipline saved the day. HSBC’s exposure to a variety of resilient economies around the world, including Asia and Latin America, gave it an edge over U.S.-based firms.

Now that the worst appears to be over, HSBC already has taken the appropriate medicine: It raised almost $20 billion in capital to bring its Tier 1 capital to a very high 10.1% and began a major clean up of its existing problem areas. That means loan loss provisions will be decreasing throughout 2010 and eventually to a low of 1.1% within a couple of years. And capitalization will keep growing as the company does a sale-leaseback of its New York headquarters.

In the meantime, HSBC’s growing net interest margin is likely to keep expanding strongly as interest rates rise and yield curves around the world become steeper. You see, inflation is a bonanza for banks, which take deposits short-term and lend longer term. Thus, when longer-term interest rates rise more than short term rates, banks smile. And the world is still employing re-flationary fiscal and monetary policies, which means that this is very likely to occur.

The upside does not stop there, either.

HSBC’s more than $1.1 trillion in customer deposits – mostly from its more than 125 million retail customers – are very stable, because retail customers are less likely to switch banks than are its 2.8 million corporate customers.

HSBC also has announced that it is moving its Chief Executive Officer Michael Geoghegan to Hong Kong – the very place that it started business in 1865. A “little” detail: HSBC will be listing its shares there pretty soon, and this exchange is well known for explosive growth in the stock prices of Chinese banks that brought out initial public offerings (IPOs).

Now, HSBC is not really a Chinese bank. But the relocation of the its top executive to Hong Kong, its already strong presence in the region, and its announcements about pending negotiations to acquire the Asian businesses from troubled Royal Bank of Scotland Group PLC (NYSE ADR: RBS) and ING Groep, N.V. (NYSE ADR: ING) will give HSBC a very strong presence.

HSBC is looking to pick up the retail and commercial-banking assets in China, India and Malaysia from Royal Bank of Scotland and the private-banking assets of ING. There are no guarantees of victory, but this is precisely what a strong bank should do; take advantage of the crisis to grow in a disciplined fashion in its core areas of expertise.

In addition to HSBC’s expansion in private banking, retail and commercial banking, the firm is also expanding in insurance. So, we see a focused strategy of expanding in desirable, profitable and fast-growing activities in the most dynamic economies. This is just too good to pass up.

Tough times often provide salivating opportunities for the players that did their homework and remained boringly disciplined during the preceding benign credit cycle. And that’s precisely the case for HSBC right now. So hop along for the ride, as this very well managed and strong bank expands and recovers from a global recession.

HSBC’s stock price should appreciate very strongly over the next couple of years.

Technically, the stock has crossed the 200-day moving average to the upside, it appears oversold and is sitting on the 50-day moving average. Now is a good moment to buy it. If you see market-induced weakness in the stock before yearend, I would add to the exposure and hold long term.

Recommendation: Buy HSBC Holdings PLC is (NYSE ADR: HBC) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in HSBC Holdings PLC.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Map VIP" trading service.

And in a new free report, Marquez discusses his find of one huge potential profit play in the form of an energy company that controls a resource that could soon replace oil as the world's most coveted energy resource. Projected demand for this wonder fuel already exceeds production by 16 times. Just in the next 90-120 days, investors in this most precious commodity could see gains of 100% as the world market for this substance shoots past $90 billion. And you can see a copy of that free report, simply by clicking here.]

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Horacio Marquez
Contributing Editor
Money Morning

H.J. Heinz Co. (NYSE: HNZ) dominates in the ketchup market.  There is no second.  And Heinz has taken advantage of its revered ketchup brand over the years to develop organically and acquire other brands. 

However, its overdependence on developed markets and a sluggish U.S. consumer are currently holding the company back.

Emerging markets are where growth is today. It’s clear that Heinz understands that, because emerging markets now account for about 14% of the company’s sales.  But the rate of Heinz’s emerging market sales growth is still disappointing. 

Heinz has been growing this category, but only at a rate of about 1% to 2% of its total sales per year – even with the company’s brand acquisitions. And to make matters worse Heinz was hit with currency losses in its most recent quarter, and these currency dynamics will likely persist.

Heinz’s emphasis on China, Russia, India, as well as other emerging markets like Poland and the Middle East is encouraging.  But it is disappointing to see a lack of emphasis on Brazil. 

In addition to the challenges Heinz faces in penetrating new markets, the company is up against strong headwinds at home. Heinz’s vulnerability to upswings in commodity prices poses a risk to margins.  And while Heinz has been confident enough in the strength of its brands to increase prices, more cash-strapped consumers are switching to generic brands to increase savings.  The result has been a 4% drop in volumes.  Consumer habits do not change easily, so this trend will be difficult to reverse.

Looking forward, the consumers in the United States and other advanced economies will remain weak.  American consumers, in particular, continue to struggle with high levels of debt, surging unemployment, and depleted nest eggs.  In fact, the wealth effect of seeing an average 15% drop in the value of their homes – which comprises some 70% of the equity of a typical U.S. household – and the huge drop in the equity markets – which represents another 20% of the wealth of households – has prompted consumers to increase their savings rate for the first time in decades.

The personal savings rate is near 5%, and it could exceed 8%.  This means that consumption will remain depressed and consumers will remain focused on cost savings for the foreseeable future.  Therefore, the shift at supermarkets to generic labels will continue.

This trend also will have a negative impact on Heinz’s food-service segment, which comprises almost 15% of its sales.   Food-service sales will suffer disproportionately as people stay more at home instead of dining out.

Longer term, as the U.S. and other advanced economies recover, and Heinz achieves stronger market penetrations in fast-growing markets, I believe it will indeed be able to produce above-average returns.  But in the meantime, very strong cashflows from its existing brands will support Heinz stock and allow the company to return an attractive dividend. 

And right now, the 4.2% dividend yield that Heinz’s stock offers is very appetizing.  So long term holders should keep holding the stock.

However, the current headwinds for the company and challenges in the U.S. market, foreign exchange, commodity costs and other costs involved in penetrating new markets will keep limiting the stock’s appeal — even as a defensive play in down market periods.

The stock’s Price/Earnings to Growth (PEG) ratio, which is above 2, is a strong warning sign.  It says that buying at these levels is paying too high a premium for the Heinz’s earnings growth rate.  That is symptomatic of the headwinds in earnings that I mentioned previously.  Thus, it is not advisable to go into this stock right now.

I would stick with our many defensive stock recommendations, like Campbell Soup Co. (NYSE: CPB), The Coca-Cola Co. (NYSE: KO) and Goldman Sachs Group Inc. (NYSE: GS), which have outperformed and are executing strongly in emerging economies.

Recommendation: Hold H.J. Heinz Co. (NYSE: HNZ) long term.  Short term-oriented buyers should abstain for the moment (**).

(**)  Special Note of Disclosure: Horacio Marquez holds no interest in H.J. Heinz Co.

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