With shares in Lloyds (LSE: LLOY) falling by 5% in the last month at the same time as the FTSE 100 has risen by 3%, it’s understandable that the bank’s investors are feeling frustrated with its performance. After all, most stocks have performed relatively well in recent weeks and yet Lloyds has continued the run that has seen its valuation decline by 19% in the last year.
At the same time, other banks are faring much better. For example, Virgin Money (LSE: VM) has risen by 4.5% in the last month and BGEO (LSE: BGEO) is up by over 10% during the same time period. As such, buying those two stocks would have been a sound short-term move.
What’s the alternative?
Looking further ahead though, Lloyds continues to offer excellent capital gain prospects. A key reason for this is its low valuation, with its shares currently trading on a price-to-earnings (P/E) ratio of 7.5. This indicates tremendous upside potential, while the bank’s yield of 5.9% indicates that it’s set to become an income favourite among dividend-seeking investors. This has the scope to push its share price higher and to reverse its lacklustre performance of recent months.
On both of these fronts, Lloyds is superior to Virgin Money and BGEO. In the case of the former, it trades on a P/E ratio of 13.2 which, while not high, offers less upward rerating potential than Lloyds. And with it yielding just 1.3%, Virgin Money remains a rather unappealing income play – in the short term at least.
Similarly, BGEO trades on a P/E ratio of 9.1, which is also higher than Lloyds’ rating. On the dividend front BGEO offers a yield of 4.4% which, while highly appealing, is less so than Lloyds at the present time.
Future growth
However, where BGEO and Virgin Money add real value compared to Lloyds is with regard to their growth prospects. While Lloyds is forecast to post a fall in its earnings of 8% in 2016, Virgin Money and BGEO are expected to deliver rises in their bottom lines of 33% and 24%, respectively. And when these figures are combined with their P/E ratios, they equate to price-to-earnings growth (PEG) ratios of only 0.4 for both stocks. This indicates that they offer growth at a very reasonable price and could continue to offer excellent capital gains following their share price rises of the last month.
Despite this, Lloyds still appears to have a superior risk/reward ratio. Certainly, its growth rate may be lower, but its shares are cheaper, have a higher yield and perhaps most importantly, Lloyds has a size and scale advantage over Virgin Money and BGEO. This means that if economic conditions worsen and default rates rise, Lloyds appears to have the strongest balance sheet through which to cope. Therefore, while Virgin Money and BGEO may be worth buying, Lloyds seems to be the preferred option – especially given the challenging outlook for the world economy.
