The Lloyds (LSE: LLOY) share price showed little inclination to join in the FTSE 100 rally through April and May. However, that changed last week. It soared 19%, flying far ahead of the Footsie’s 6.7% rise.
Closing on Friday at 35.55p, and with further gains to 37.5p today (as I write), could the big recovery finally be underway for the much-battered Lloyds share price?
Buy low and sell high For stocks in highly cyclical sectors, such as banking, I believe a value-investing approach is the way to go. That’s to say, buy low and sell high. As opposed to buy and hold forever. If you look at a multi-decade chart of the Lloyds share price, you’ll see how a long-term, buy-and-hold strategy hasn’t done investors any favours.
Furthermore, many get sucked into buying cyclical stocks at the worst possible time. Namely, when profits are booming, price-to-earnings (P/E) ratios are low, and dividend yields are generous. This was the profile of Lloyds in recent years.
Some of us at the Motley Fool — admittedly a minority — were bearish on the Black Horse. They cautioned readers that, in the case of cyclical stocks, high profits, low P/Es and big dividends are very much not indicators of an unmissable bargain with a wide margin of safety. It may seem counter-intuitive, but the best — and safest — time to buy cyclicals is when profits are crushed, P/Es are high, and dividends often slashed or suspended.
At such times, you can pick up shares at low prices and, subsequently, sell high in the cyclical recovery.
Positive indicators for the Lloyds share price One of my fellow Motley Bears on Lloyds, Kevin Godbold, judged last week that the time has come to make the value play on the Black Horse. Noting that “the valuation indicators have lined up,” Kevin pointed to:
- A massive profit fall forecast for 2020
- A forward P/E of almost 19 (versus the single-digit P/E of recent years)
- A price-to-tangible net asset value (P/TNAV) of just below 0.5 (another good indicator of cyclical-bottom value)
- An encouraging “consolidation on the share price chart”
Am I keen on the Lloyds share price? Alongside the positive indicators, Kevin is encouraged by the situation on the ground. He’s optimistic about Covid-19 fading quickly, the lifting of restrictions on businesses and consumers, and an earnings recovery for many companies in 2021.
He may have timed the cyclical value play perfectly. However, I’m less sanguine on the outlook for the V-shaped recovery the market seems to be increasingly pricing. Even if we don’t see a second wave of the virus, I think there’s a high risk things could get a lot worse for the economy, and Lloyds’ business and share price.
Lloyds’ last reported TNAV was 57.4p per share. With the shares currently at 37p, the P/TNAV is 0.65. I’d want a much bigger discount than this to encourage me to play the cyclical recovery card.
As such, I’m continuing to avoid Lloyds at this stage. But I’d be very interested should we get a P/TNAV down to around 0.35 — meaning a share price of around 20p.
The post Lloyds’ share price rose 19% last week. Is it time to buy? appeared first on The Motley Fool UK.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group (LON:LLOY). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020
First published on The Motley Fool
