Having risen by 25% since the start of the year, Lloyds (LSE: LLOY) may appear to be due a pullback. Its shares, though, continue to offer a wide margin of safety, while recent updates from the bank suggest that it is delivering on its growth potential.
As such, further outperformance of the FTSE 100 could be ahead over the long run. Alongside another stock that reported encouraging results on Monday, Lloyds could be worth buying right now.
The stock in question is supplier of ventilation products, Volution (LSE: FAN). Its interim results showed a rise in revenue of 16.3% to £114.8m, while adjusted operating profit moved 10.7% higher to £20.2m. Encouragingly, the four acquisitions that were completed in the previous year are integrating and performing well. Those acquisitions have enhanced the company’s business model, while also providing additional diversification.
The company’s performance in the UK has been relatively strong. Despite operational challenges at its Reading facility, it has achieved improved production levels that have been sustained into the second half of the year. It has also experienced good traction with its new Xenion range of decentralised heat recovery ventilation in Germany.
With Volution forecast to deliver net profit growth of 10% in the current year, it seems to have a bright future. A price-to-earnings growth (PEG) ratio of 1.3 suggests that it may have a wide margin of safety and could deliver improving share price performance.
Also offering a low valuation is Lloyds. Even though its shares have made strong gains since the start of the year, it has a price-to-earnings (P/E) ratio of around 8.5. This suggests that investors continue to price in the risks facing the bank, in terms of an uncertain outlook for the UK economy.
While that is perhaps to be expected given the political and economic challenges facing the UK, recent quarterly updates from Lloyds have generally been positive. Despite difficult trading conditions, it has been able to further reduce costs and improve its income prospects. Like all UK-focused banks, it has endured a prolonged period of low interest rates, which means that net interest margins across the sector have been suppressed. Therefore, as interest rates move higher over the coming years, there could be improving profitability ahead that has not yet been priced in by the stock market.
As ever, there are risks ahead for the stock. Brexit could have a negative impact on the economy, for example. There may also be global challenges over the coming months. But from a risk/reward perspective, Lloyds seems to be highly appealing – even after its recent stock price surge. Therefore, now could be a good time to buy it, with its growth strategy seemingly intact and it having a wide margin of safety at a time when the FTSE 100 is trading within 10% of its all-time high.
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Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.