While the FTSE 100 has endured a challenging month, its performance has not been as bad as many investors would anticipate. In fact, it is down just 2% in the period despite the global political and economic uncertainty which is now present.
Of course, a number of stocks have underperformed the index. One obvious example is Lloyds (LSE: LLOY) which is down over 7% in the last four weeks despite already trading at a super-low valuation. For example, Lloyds traded on a price to earnings (P/E) ratio of just 9.5 one month ago, which represented a huge discount to the FTSE 100’s P/E ratio. However, it still proceeded to underperform the index and it now has a rating of just 8.8.
Looking ahead, it seems unlikely that Lloyds’ valuation will move much lower. That’s because the bank has a sound strategy, a relatively low cost:income ratio and the UK economy (which is a key market for Lloyds) is performing relatively well. Clearly, the problem for Lloyds is convincing the market that it has a sound long term growth outlook, but its expected increase in dividend payments could act as a positive catalyst on its share price in the meantime.
For example, Lloyds is forecast to raise dividends per share by 58% next year. That is a staggering rate of growth and means that Lloyds is due to yield 5.3% in 2016, which puts it in among the highest yielding stocks in the FTSE 100. However, with shareholder payouts still set to represent just 49% of profit, there is scope for further dividend rises in 2017 and beyond.
As well as dividend increases, the end of state (part)ownership could have a positive impact on Lloyds’ share price. In fact, it could convince the market that Lloyds is now a very viable entity with a sustainable business model that offers a relatively appealing risk/reward opportunity. Clearly, it may take time for Lloyds to become a more in-demand stock but, with such a low valuation, it remains a very strong buy for the long term.
Meanwhile, Internetq (LSE: INTQ) has also underperformed the wider market in recent weeks. For example, its shares are down 55% in the last month even though its performance as a business has been relatively strong. In fact, last week Internetq updated the market on progress made in the first nine months of the year, with both revenue and pretax profit rising on the back of strong momentum in both of its businesses.
Looking ahead, Internetq is forecast to post a rise in earnings of 22% in the current year and a further increase in its bottom line of 31% next year. This puts it on a forward P/E ratio of just 2.7, which indicates that it offers superb capital gain potential.
However, investors may wish to hold off purchasing Interntq since its shares are continuing to fall, with them being down another 10% today. This indicates that market sentiment remains weak and, with such a low valuation, it may prove to be a case of ‘too good to be true’.
