Lloyds (LSE:LLOY) shares have been pretty volatile this year, reflecting broader market sentiment and concerns about inflation and an economic slowdown.
Few shares are traded more than Lloyds and I’ve personally been a little perplexed by the share price weakness.
In a recent update, Lloyds said that short selling of its shares had actually fallen since its last report. The bank said that 4.29m shares had been sold short, which is 0.02% of all regular shares that are available for trading. According to Benzinga Pro, Lloyds has less short interest than most of its peers.
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So maybe Lloyds shares are bottoming out.
While I think there’s growth potential over the next 18 months, I’m wondering whether I can double my money with these shares. That would mean its shares trading for 82p. Lloyds traded that high before the Brexit vote. So is it possible again?
Current headwinds
Lloyds, the UK’s second or third largest bank, faces the same issues as its peers. The British economy is looking fairly weak right now with global inflationary pressures exacerbated by a very tight labour market (not enough people are working).
Negative economic forecasts increase the likelihood of bad debt and this wouldn’t be good for Lloyds. Some 71% of Lloyds’s loans are mortgages and there’s some uncertainty about the direction of mortgage volumes amid the current rate rises.
The bull case
Yes, the economic situation doesn’t look too great right now, although new data for May suggests the UK economy grew fastest than anticipated.
But I think there are several reasons to be bullish about Lloyds. Firstly, higher interest rates mean higher margins for banks. Lloyds will even receive more interest on the money it leaves with the Bank of England.
In fact, Credit Suisse recently said it expects UK banks to raise their guidance for the year on the back of higher net interest margins and net interest income. The Zurich-based bank actually said Lloyds was its “top pick” and gave it a target price of 71p — 73% above the current share price.
In the long run, I also like Lloyds’ weighing towards property. The UK property market will remain strong as demand continues to outstrip supply.
Lloyds is also purchasing some 50,000 homes over the next decade as it enters the UK rental market. Depending on the area, rental margins should supplement its banking operations.
Doubling my money
A doubling of the Lloyds share price isn’t going to happen overnight. However, it has a price-to-earnings (P/E) ratio of 5.6 and, the sector average is around 9.8.
So, what type of performance would justify a P/E around the sector average. Well, I don’t think Lloyds is far off. 2021 pre-tax profits were £6.9bn, so if they were to rise to £8bn (easier said than done) and Lloyds were trading for 82p a share, its P/E ratio would still only be slightly above the sector average.
I genuinely believe that higher rates and new ventures, notably around rental, will boost profitability significantly. But, I don’t see the share price rising until the clouds over the UK economy have lifted.
Even if performance stayed the same, a P/E in line with the sector average would mean a share price of 62.5p.
I’ve already bought Lloyds shares, and would buy more at 41p.
