At the time of writing, Lloyds (LSE:LLOY) shares are trading for just short of 45p. That’s up from lows in the early autumn and up 7% over the past month.
Unfortunately for shareholders, including myself, the stock has moved sideways for years. However, how would I have fared if I’d have invested in Lloyds before the Brexit vote on 23 June 2016?
Well, at that time, Lloyds was trading for around 67p. The stock remained at those levels despite the Brexit vote and until the pandemic. It’s never truly recovered since.
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So if I had invested £1,000 in the stock then, today my investment would be worth just £672, as the stock is down 32.8%.
That’s obviously a very poor return. However, I would have received around £200 in dividends during the period. Nonetheless, it’s still a net loss if I were to sell today.
Headwinds and sentiment
If I didn’t sell today, I could call this poor performance an unrealised loss.
In terms of investor sentiment, the banking giant has been struggling of late amid concerns about the health of the British economy and the resilience of borrowers as interest rates rise.
Under the bank’s worst-case scenario, Lloyds is projecting expected credit losses (ECL) to reach a substantial £10.1bn. That’s almost double its base-case scenario.
In turn, many investors have been giving Lloyds a wide berth. After all, investing in a cyclical stock before a recession doesn’t seem like a good idea.
Brighter skies
However, in my view, these risks are overplayed. The British economy is continuing to prove its strength despite monetary tightening and fiscal drag.
Of course, the forecast for the next year isn’t great, but it’s much brighter than Lloyds’s worst-case scenario. And this is broadly supported by brokerages and analysts with the average share price target for the bank now 60p.
In a recent note, Morgan Stanley raised its stance on Lloyds, setting a target price of 64p.
In an optimistic scenario, Morgan Stanley envisions the high street lender reaching 85p a share. This is dependent upon a more robust economy and a tangible equity return of 14% in the fiscal year 2024 if interest rates fall slowly.
The US bank highlights Lloyds’ market share in the mortgage space providing some buffer against competition.
Meanwhile, its worth highlighting that the average Lloyds customer has an annual income of £75,000. This provides some insulation against economic pressures.
It’s also worth noting that a recession is likely to be a ‘job-full recession’ — one is which employment remains high.
Attractive valuation
Lloyds has one of the most attractive valuations on the FTSE 100. Sometimes cheap stocks can reflect a poor growth outlook. But that’s not the case here.
Lloyds trades at 4.7 times TTM (trailing 12 months) earnings and 6.4 times forward earnings. That’s very cheap.
However, it also trades with a price/earnings-to-growth (PEG) ratio of 0.53.
The PEG ratio is an earnings metric for growth, calculated by dividing the price-to-earnings ratio by the expected growth rate over the coming five years.
In other words, investors aren’t appreciating Lloyds’ growth and earnings potential. And that’s why I’m buying more.
