Certain industries and companies have been hit harder than others in recent weeks and months because of the fears over the UK leaving the EU without a deal. Housebuilders and UK-focused banks were certainly among them, given their lack of overseas earnings and reliance on the UK economy.
Last Friday, though, their depressed share prices were catapulted as investors started to believe that a deal would be possible before the end of the month. Even with some share prices jumping by over 12% in a day, however, I believe companies like Barratt Developments (LSE: BDEV) and Lloyds Banking Group (LSE: LLOY) still look cheap.
An 11% share price jump
Shares in housebuilder Barratt were among the FTSE 100’s highest risers on Friday, leaping up over 11% in a single day. Over one year, the share price is up 24%.
With a low P/E of 8 and a strong yield of over 4%, in my opinion, the shares do still look very cheap. Better than that, Barratt is a well-run business. Its management has been with the business for a long time. The chief executive has been on the board since 2009 and the deputy chief executive and chief operating officer since 2001. They make up the kind of high-quality management I think investors like to see at big companies, partly because it shows stability and belief by leadership of the company.
The builder is focusing on margins and returns on capital employed (ROCE), which I think is a positive sign for investors. Alongside modest growth in volumes of 3%-5% for wholly-owned home completions (so, excluding joint ventures) there’s plenty of scope for increased profits and revenues in the coming years, barring an economic downturn.
The top FTSE 100 riser
The Lloyds share price was the biggest riser on Friday, up by 12.27% on the day. Its shares also still look cheap on a P/E of 9, however. Investors also are rewarded with a generous and growing dividend yield, which is currently around 5.4%.
The share price has been up and down over the course of the last 12 months. I think the bank is strong and stable and if it weren’t for Brexit concerns, the share price would be far higher. Lloyds’ reliance on the UK and on retail banking makes it more vulnerable to investor concern around Brexit. On the flipside though, because the share price is so cheap, if concerns about a no-deal Brexit are alleviated, the share price rises.
On the financial side, Lloyds will be glad to see the back of PPI claims, which once again hurt its results. It had to make a £550m provision for a last-minute surge in claims before the deadline for them closed. This dragged the bank’s pre-tax profits for the first half of the year down to £2.9bn and below analysts’ forecasts.
Brexit is the chief risk facing the bank, but with the shares trading cheaply as shown by the low P/E ratio and with opportunities from moving into wealth management, reducing costs via digitalisation and being one of the most profitable of the listed banks, I think whatever happens with Brexit, Lloyds is well-positioned for future success and to deliver for investors.
